UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended SeptemberJune 30, 20222023 |
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OR |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from __________ to __________ |
Commission File No. 000-20827
____________________
CASS INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| | | | | |
Missouri | 43-1265338 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
12444 Powerscourt Drive, Suite 550 St. Louis, Missouri | 63131 |
(Address of principal executive offices) | (Zip Code) |
(314) 506-5500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading symbols | | Name of each exchange on which registered |
Common stock, par value $.50 | | CASS | | The Nasdaq Global Select Market |
____________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
Large Accelerated Filer | o | Accelerated Filer | x | | |
| | | | | |
Non-Accelerated Filer | o | Smaller Reporting Company | o | Emerging Growth Company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
The number of shares outstanding of the registrant's only class of common stock as of October 22, 2022:July 27, 2023: Common stock, par value $.50 per share – 13,661,35313,666,955 shares outstanding.
TABLE OF CONTENTS
Forward-looking Statements - Factors That May Affect Future Results
This report may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors beyond our control, which may cause future performance to be materially different from expected performance summarized in the forward-looking statements. These risks, uncertainties and other factors are discussed in Part I, Item 1A, “Risk Factors” of the Company’s 20212022 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”), which may be updated from time to time in our future filings with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, or changes to future results over time.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share and Per Share Data)
| | | September 30, 2022 (Unaudited) | | December 31, 2021 | | June 30, 2023 (Unaudited) | | December 31, 2022 |
Assets | Assets | | | | Assets | | | |
Cash and due from banks | Cash and due from banks | $ | 14,799 | | | $ | 12,301 | | Cash and due from banks | $ | 27,361 | | | $ | 20,995 | |
Short-term investments | Short-term investments | 332,195 | | | 502,627 | | Short-term investments | 243,112 | | | 179,947 | |
Cash and cash equivalents | Cash and cash equivalents | 346,994 | | | 514,928 | | Cash and cash equivalents | 270,473 | | | 200,942 | |
Securities available-for-sale, at fair value | Securities available-for-sale, at fair value | 763,789 | | | 673,453 | | Securities available-for-sale, at fair value | 637,513 | | | 754,468 | |
| Loans | Loans | 1,037,101 | | | 960,567 | | Loans | 1,055,848 | | | 1,082,906 | |
Less: Allowance for credit losses | Less: Allowance for credit losses | 13,049 | | | 12,041 | | Less: Allowance for credit losses | 13,194 | | | 13,539 | |
Loans, net | Loans, net | 1,024,052 | | | 948,526 | | Loans, net | 1,042,654 | | | 1,069,367 | |
Payments in advance of funding | Payments in advance of funding | 269,221 | | | 291,427 | | Payments in advance of funding | 269,180 | | | 293,775 | |
Premises and equipment, net | Premises and equipment, net | 19,375 | | | 18,113 | | Premises and equipment, net | 24,320 | | | 19,958 | |
Investment in bank-owned life insurance | Investment in bank-owned life insurance | 47,714 | | | 43,176 | | Investment in bank-owned life insurance | 48,564 | | | 47,998 | |
Goodwill | Goodwill | 17,309 | | | 14,262 | | Goodwill | 17,309 | | | 17,309 | |
Other intangible assets, net | Other intangible assets, net | 4,321 | | | 2,564 | | Other intangible assets, net | 3,735 | | | 4,126 | |
Accounts and drafts receivable from customers | | Accounts and drafts receivable from customers | 83,627 | | | 95,779 | |
Other assets | Other assets | 118,040 | | | 48,452 | | Other assets | 73,421 | | | 69,301 | |
Total assets | Total assets | $ | 2,610,815 | | | $ | 2,554,901 | | Total assets | $ | 2,470,796 | | | $ | 2,573,023 | |
| Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | Liabilities and Shareholders’ Equity | |
Liabilities: | Liabilities: | | Liabilities: | |
Deposits: | Deposits: | | Deposits: | |
Noninterest-bearing | Noninterest-bearing | $ | 581,731 | | | $ | 582,642 | | Noninterest-bearing | $ | 679,107 | | | $ | 642,757 | |
Interest-bearing | Interest-bearing | 647,990 | | | 638,861 | | Interest-bearing | 512,327 | | | 614,460 | |
Total deposits | Total deposits | 1,229,721 | | | 1,221,503 | | Total deposits | 1,191,434 | | | 1,257,217 | |
Accounts and drafts payable | Accounts and drafts payable | 1,146,334 | | | 1,050,396 | | Accounts and drafts payable | 1,021,524 | | | 1,067,600 | |
Other liabilities | Other liabilities | 43,025 | | | 37,204 | | Other liabilities | 42,692 | | | 41,881 | |
Total liabilities | Total liabilities | 2,419,080 | | | 2,309,103 | | Total liabilities | 2,255,650 | | | 2,366,698 | |
| Shareholders’ Equity: | Shareholders’ Equity: | | Shareholders’ Equity: | |
Preferred stock, par value $.50 per share; 2,000,000 shares authorized and no shares issued | Preferred stock, par value $.50 per share; 2,000,000 shares authorized and no shares issued | — | | | — | | Preferred stock, par value $.50 per share; 2,000,000 shares authorized and no shares issued | — | | | — | |
Common stock, par value $.50 per share; 40,000,000 shares authorized and 15,505,772 shares issued at September 30, 2022 and December 31, 2021; 13,660,388 and 13,734,295 shares outstanding at September 30, 2022 and December 31, 2021, respectively. | 7,753 | | | 7,753 | | |
Common stock, par value $.50 per share; 40,000,000 shares authorized and 15,505,772 shares issued at June 30, 2023 and December 31, 2022; 13,668,077 and 13,669,656 shares outstanding at June 30, 2023 and December 31, 2022, respectively. | | Common stock, par value $.50 per share; 40,000,000 shares authorized and 15,505,772 shares issued at June 30, 2023 and December 31, 2022; 13,668,077 and 13,669,656 shares outstanding at June 30, 2023 and December 31, 2022, respectively. | 7,753 | | | 7,753 | |
Additional paid-in capital | Additional paid-in capital | 205,624 | | | 204,276 | | Additional paid-in capital | 206,734 | | | 207,422 | |
Retained earnings | Retained earnings | 126,361 | | | 112,220 | | Retained earnings | 137,996 | | | 131,682 | |
Common shares in treasury, at cost (1,845,384 shares at September 30, 2022 and 1,771,477 shares at December 31, 2021) | (81,624) | | | (78,904) | | |
Accumulated other comprehensive (loss) income | (66,379) | | | 453 | | |
Common shares in treasury, at cost (1,837,695 shares at June 30, 2023 and 1,836,116 shares at December 31, 2022) | | Common shares in treasury, at cost (1,837,695 shares at June 30, 2023 and 1,836,116 shares at December 31, 2022) | (80,943) | | | (81,211) | |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (56,394) | | | (59,321) | |
Total shareholders’ equity | Total shareholders’ equity | 191,735 | | | 245,798 | | Total shareholders’ equity | 215,146 | | | 206,325 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 2,610,815 | | | $ | 2,554,901 | | Total liabilities and shareholders’ equity | $ | 2,470,796 | | | $ | 2,573,023 | |
See accompanying notes to unaudited consolidated financial statements.
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Data)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Fee Revenue and Other Income: | Fee Revenue and Other Income: | | Fee Revenue and Other Income: | |
Processing fees | Processing fees | $ | 18,964 | | | $ | 18,461 | | | $ | 57,184 | | | $ | 55,882 | | Processing fees | $ | 19,386 | | | $ | 19,184 | | | $ | 38,899 | | | $ | 38,220 | |
Financial fees | Financial fees | 11,252 | | | 8,624 | | | 32,406 | | | 23,122 | | Financial fees | 11,662 | | | 10,623 | | | 22,921 | | | 21,155 | |
Other | Other | 1,568 | | | 492 | | | 3,275 | | | 1,735 | | Other | 1,025 | | | 844 | | | 2,360 | | | 1,706 | |
Total fee revenue and other income | Total fee revenue and other income | 31,784 | | | 27,577 | | | 92,865 | | | 80,739 | | Total fee revenue and other income | 32,073 | | | 30,651 | | | 64,180 | | | 61,081 | |
| Interest Income: | Interest Income: | | Interest Income: | |
Interest and fees on loans | Interest and fees on loans | 10,006 | | | 8,987 | | | 27,890 | | | 26,270 | | Interest and fees on loans | 12,931 | | | 9,107 | | | 25,166 | | | 17,884 | |
Interest and dividends on securities: | Interest and dividends on securities: | | Interest and dividends on securities: | |
Taxable | Taxable | 2,947 | | | 731 | | | 6,679 | | | 1,387 | | Taxable | 3,688 | | | 2,276 | | | 7,274 | | | 3,732 | |
Exempt from federal income taxes | Exempt from federal income taxes | 1,551 | | | 1,760 | | | 4,867 | | | 5,331 | | Exempt from federal income taxes | 989 | | | 1,639 | | | 2,197 | | | 3,316 | |
Interest on federal funds sold and other short-term investments | Interest on federal funds sold and other short-term investments | 2,249 | | | 241 | | | 3,423 | | | 515 | | Interest on federal funds sold and other short-term investments | 2,100 | | | 958 | | | 5,213 | | | 1,174 | |
Total interest income | Total interest income | 16,753 | | | 11,719 | | | 42,859 | | | 33,503 | | Total interest income | 19,708 | | | 13,980 | | | 39,850 | | | 26,106 | |
| Interest Expense: | Interest Expense: | | Interest Expense: | |
Interest on deposits | Interest on deposits | 782 | | | 287 | | | 1,344 | | | 915 | | Interest on deposits | 3,651 | | | 339 | | | 6,822 | | | 562 | |
| Interest on short-term borrowings | | Interest on short-term borrowings | 43 | | | — | | | 116 | | | — | |
Total interest expense | Total interest expense | 782 | | | 287 | | | 1,344 | | | 915 | | Total interest expense | 3,694 | | | 339 | | | 6,938 | | | 562 | |
Net interest income | Net interest income | 15,971 | | | 11,432 | | | 41,515 | | | 32,588 | | Net interest income | 16,014 | | | 13,641 | | | 32,912 | | | 25,544 | |
Provision for (release of) credit losses | 550 | | | 340 | | | 850 | | | (870) | | |
Net interest income after provision for (release of) credit losses | 15,421 | | | 11,092 | | | 40,665 | | | 33,458 | | |
(Release of) provision for credit losses | | (Release of) provision for credit losses | (120) | | | 70 | | | (460) | | | 300 | |
Net interest income after (release of) provision for credit losses | | Net interest income after (release of) provision for credit losses | 16,134 | | | 13,571 | | | 33,372 | | | 25,244 | |
Total net revenue | Total net revenue | 47,205 | | | 38,669 | | | 133,530 | | | 114,197 | | Total net revenue | 48,207 | | | 44,222 | | | 97,552 | | | 86,325 | |
| Operating Expense: | Operating Expense: | | Operating Expense: | |
Personnel | Personnel | 26,999 | | | 23,283 | | | 77,750 | | | 68,689 | | Personnel | 29,432 | | | 26,033 | | | 59,458 | | | 50,751 | |
Occupancy | Occupancy | 970 | | | 953 | | | 2,801 | | | 2,859 | | Occupancy | 907 | | | 916 | | | 1,762 | | | 1,831 | |
Equipment | Equipment | 1,633 | | | 1,700 | | | 5,004 | | | 5,028 | | Equipment | 1,749 | | | 1,660 | | | 3,399 | | | 3,371 | |
Amortization of intangible assets | Amortization of intangible assets | 195 | | | 215 | | | 485 | | | 644 | | Amortization of intangible assets | 195 | | | 155 | | | 390 | | | 290 | |
Other operating expense | Other operating expense | 6,524 | | | 4,539 | | | 15,748 | | | 11,798 | | Other operating expense | 7,056 | | | 4,875 | | | 14,702 | | | 9,224 | |
Total operating expense | Total operating expense | 36,321 | | | 30,690 | | | 101,788 | | | 89,018 | | Total operating expense | 39,339 | | | 33,639 | | | 79,711 | | | 65,467 | |
Income before income tax expense | Income before income tax expense | 10,884 | | | 7,979 | | | 31,742 | | | 25,179 | | Income before income tax expense | 8,868 | | | 10,583 | | | 17,841 | | | 20,858 | |
Income tax expense | Income tax expense | 2,085 | | | 1,174 | | | 6,123 | | | 4,277 | | Income tax expense | 1,730 | | | 2,021 | | | 3,586 | | | 4,038 | |
Net income | Net income | $ | 8,799 | | | $ | 6,805 | | | $ | 25,619 | | | $ | 20,902 | | Net income | $ | 7,138 | | | $ | 8,562 | | | $ | 14,255 | | | $ | 16,820 | |
| Basic earnings per share | Basic earnings per share | $ | .65 | | | $ | .48 | | | $ | 1.89 | | | $ | 1.47 | | Basic earnings per share | $ | .53 | | | $ | .63 | | | $ | 1.05 | | | $ | 1.24 | |
Diluted earnings per share | Diluted earnings per share | .64 | | | .48 | | | 1.86 | | | 1.45 | | Diluted earnings per share | .52 | | | .62 | | | 1.03 | | | 1.22 | |
See accompanying notes to unaudited consolidated financial statements.
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Thousands)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Comprehensive Income: | Comprehensive Income: | | Comprehensive Income: | |
Net income | Net income | $ | 8,799 | | | $ | 6,805 | | | $ | 25,619 | | | $ | 20,902 | | Net income | $ | 7,138 | | | $ | 8,562 | | | $ | 14,255 | | | $ | 16,820 | |
Other comprehensive (loss) income: | | |
Net unrealized loss on securities available-for-sale | (26,127) | | | (4,438) | | | (87,159) | | | (7,086) | | |
Other comprehensive income (loss): | | Other comprehensive income (loss): | |
Net unrealized (loss) gain on securities available-for-sale | | Net unrealized (loss) gain on securities available-for-sale | (5,627) | | | (23,538) | | | 3,554 | | | (61,037) | |
Tax effect | Tax effect | 6,218 | | | 1,057 | | | 20,744 | | | 1,687 | | Tax effect | 1,339 | | | 5,602 | | | (846) | | | 14,527 | |
Reclassification adjustments for losses (gains) included in net income | Reclassification adjustments for losses (gains) included in net income | (13) | | | 1 | | | (15) | | | (44) | | Reclassification adjustments for losses (gains) included in net income | 199 | | | (2) | | | 160 | | | (2) | |
Tax effect | Tax effect | 3 | | | — | | | 3 | | | 10 | | Tax effect | (47) | | | — | | | (38) | | | — | |
Foreign currency translation adjustments | Foreign currency translation adjustments | (195) | | | (168) | | | (405) | | | (145) | | Foreign currency translation adjustments | 12 | | | (209) | | | 97 | | | (210) | |
Total comprehensive (loss) income | $ | (11,315) | | | $ | 3,257 | | | $ | (41,213) | | | $ | 15,324 | | |
Total comprehensive income (loss) | | Total comprehensive income (loss) | $ | 3,014 | | | $ | (9,585) | | | $ | 17,182 | | | $ | (29,902) | |
See accompanying notes to unaudited consolidated financial statements.
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Cash Flows From Operating Activities: | Cash Flows From Operating Activities: | | | | Cash Flows From Operating Activities: | | | |
Net income | Net income | $ | 25,619 | | | $ | 20,902 | | Net income | $ | 14,255 | | | $ | 16,820 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization | 8,311 | | | 9,340 | | |
Gains on sales of securities | (15) | | | (44) | | |
Amortization of intangible assets | | Amortization of intangible assets | 390 | | | 290 | |
Net amortization of premium/discount on investment securities | | Net amortization of premium/discount on investment securities | 2,287 | | | 3,321 | |
Depreciation | | Depreciation | 2,028 | | | 2,036 | |
Losses (gains) on sales of securities | | Losses (gains) on sales of securities | 160 | | | (2) | |
Stock-based compensation expense | Stock-based compensation expense | 4,479 | | | 2,585 | | Stock-based compensation expense | 2,859 | | | 3,172 | |
Provision for (release of) credit losses | 850 | | | (870) | | |
Decrease in deferred income tax asset | — | | | 22 | | |
Increase in current income tax liability | 641 | | | 79 | | |
Decrease in pension liability | (1,877) | | | (1,252) | | |
(Release of) provision for credit losses | | (Release of) provision for credit losses | (460) | | | 300 | |
| (Decrease) increase in current income tax liability | | (Decrease) increase in current income tax liability | (1,036) | | | 634 | |
Increase (decrease) in pension liability | | Increase (decrease) in pension liability | 224 | | | (1,274) | |
Increase in accounts receivable | Increase in accounts receivable | (2,540) | | | (628) | | Increase in accounts receivable | (5,446) | | | (1,805) | |
Other operating activities, net | Other operating activities, net | 5,331 | | | 546 | | Other operating activities, net | 1,712 | | | 7,570 | |
Net cash provided by operating activities | Net cash provided by operating activities | 40,799 | | | 30,680 | | Net cash provided by operating activities | 16,973 | | | 31,062 | |
| Cash Flows From Investing Activities: | Cash Flows From Investing Activities: | | Cash Flows From Investing Activities: | |
Proceeds from sales of securities available-for-sale | Proceeds from sales of securities available-for-sale | 3,838 | | | 43,190 | | Proceeds from sales of securities available-for-sale | 111,053 | | | 1,521 | |
Proceeds from maturities of securities available-for-sale | Proceeds from maturities of securities available-for-sale | 45,740 | | | 83,265 | | Proceeds from maturities of securities available-for-sale | 22,501 | | | 30,357 | |
Purchase of securities available-for-sale | Purchase of securities available-for-sale | (231,891) | | | (322,336) | | Purchase of securities available-for-sale | (15,332) | | | (162,853) | |
Net (increase) decrease in loans | (76,521) | | | 19,229 | | |
Net decrease in loans | | Net decrease in loans | 27,058 | | | 1,092 | |
Purchase of bank-owned life insurance | Purchase of bank-owned life insurance | (4,538) | | | (24,868) | | Purchase of bank-owned life insurance | — | | | (4,259) | |
Asset acquisition of Touchpoint | Asset acquisition of Touchpoint | (4,425) | | | — | | Asset acquisition of Touchpoint | — | | | (4,425) | |
Decrease (increase) in payments in advance of funding | Decrease (increase) in payments in advance of funding | 22,206 | | | (71,816) | | Decrease (increase) in payments in advance of funding | 24,595 | | | (21,745) | |
Purchases of premises and equipment, net | Purchases of premises and equipment, net | (4,270) | | | (2,697) | | Purchases of premises and equipment, net | (6,390) | | | (3,393) | |
Net cash used in investing activities | (249,861) | | | (276,033) | | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 163,485 | | | (163,705) | |
| Cash Flows From Financing Activities: | Cash Flows From Financing Activities: | | Cash Flows From Financing Activities: | |
Net decrease in noninterest-bearing demand deposits | (911) | | | (26,184) | | |
Net increase in interest-bearing demand and savings deposits | 20,672 | | | 67,930 | | |
Net decrease in time deposits | (11,543) | | | (5,285) | | |
Net change in accounts and drafts payable and other customer receivables | 50,239 | | | 70,099 | | |
Net increase in noninterest-bearing demand deposits | | Net increase in noninterest-bearing demand deposits | 36,350 | | | 21,850 | |
Net decrease in interest-bearing demand and savings deposits | | Net decrease in interest-bearing demand and savings deposits | (122,399) | | | (48,982) | |
Net increase (decrease) in time deposits | | Net increase (decrease) in time deposits | 20,266 | | | (4,796) | |
Net decrease (increase) in accounts and drafts receivable from customers | | Net decrease (increase) in accounts and drafts receivable from customers | 12,152 | | | (24,139) | |
| Net decrease in accounts and drafts payable | | Net decrease in accounts and drafts payable | (46,076) | | | (51,526) | |
Cash dividends paid | Cash dividends paid | (11,478) | | | (11,576) | | Cash dividends paid | (7,941) | | | (7,654) | |
Purchase of common shares for treasury | Purchase of common shares for treasury | (5,299) | | | (18,975) | | Purchase of common shares for treasury | (2,377) | | | (5,299) | |
Other financing activities, net | Other financing activities, net | (552) | | | (875) | | Other financing activities, net | (902) | | | (505) | |
Net cash provided by financing activities | 41,128 | | | 75,134 | | |
Net decrease in cash and cash equivalents | (167,934) | | | (170,219) | | |
Net cash used in financing activities | | Net cash used in financing activities | (110,927) | | | (121,051) | |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | 69,531 | | | (253,694) | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 514,928 | | | 670,528 | | Cash and cash equivalents at beginning of period | 200,942 | | | 514,928 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 346,994 | | | $ | 500,309 | | Cash and cash equivalents at end of period | $ | 270,473 | | | $ | 261,234 | |
| Supplemental information: | Supplemental information: | | Supplemental information: | |
Cash paid for interest | Cash paid for interest | $ | 1,314 | | | $ | 885 | | Cash paid for interest | $ | 6,697 | | | $ | 549 | |
Cash paid for income taxes | Cash paid for income taxes | 5,531 | | | 4,176 | | Cash paid for income taxes | 4,598 | | | 2,609 | |
See accompanying notes to unaudited consolidated financial statements.
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED SEPTEMBERJUNE 30, 20222023 AND 20212022
(Unaudited)
(Dollars in Thousands except per share data)
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balance, June 30, 2021 | $ | 7,753 | | | $ | 203,098 | | | $ | 105,398 | | | $ | (53,437) | | | $ | (2,045) | | | $ | 260,767 | | |
Balance, March 31, 2022 | | Balance, March 31, 2022 | $ | 7,753 | | | $ | 203,149 | | | $ | 116,646 | | | $ | (82,348) | | | $ | (28,122) | | | $ | 217,078 | |
Net income | Net income | | 6,805 | | | 6,805 | | Net income | | 8,562 | | | 8,562 | |
Cash dividends ($0.27 per share) | | (3,815) | | | (3,815) | | |
Issuance of 4,412 common shares pursuant to stock-based compensation plan, net | | (51) | | | 134 | | | 83 | | |
Cash dividends ($0.28 per share) | | Cash dividends ($0.28 per share) | | (3,822) | | | (3,822) | |
Issuance of 18,637 common shares pursuant to stock-based compensation plan, net | | Issuance of 18,637 common shares pursuant to stock-based compensation plan, net | | (749) | | | 819 | | | 70 | |
| Stock-based compensation expense | Stock-based compensation expense | | 1,066 | | | 1,066 | | Stock-based compensation expense | | 2,082 | | | 2,082 | |
Purchase of 314,672 common shares | | (13,715) | | | (13,715) | | |
Purchase of 5,500 common shares | | Purchase of 5,500 common shares | | (213) | | | (213) | |
Other comprehensive loss | Other comprehensive loss | | (3,548) | | | (3,548) | | Other comprehensive loss | | (18,143) | | | (18,143) | |
Balance, September 30, 2021 | $ | 7,753 | | | $ | 204,113 | | | $ | 108,388 | | | $ | (67,018) | | | $ | (5,593) | | | $ | 247,643 | | |
Balance, June 30, 2022 | | Balance, June 30, 2022 | $ | 7,753 | | | $ | 204,482 | | | $ | 121,386 | | | $ | (81,742) | | | $ | (46,265) | | | $ | 205,614 | |
| | Balance, June 30, 2022 | $ | 7,753 | | | $ | 204,482 | | | $ | 121,386 | | | $ | (81,742) | | | $ | (46,265) | | | $ | 205,614 | | |
Balance, March 31, 2023 | | Balance, March 31, 2023 | $ | 7,753 | | | $ | 206,614 | | | $ | 134,822 | | | $ | (79,419) | | | $ | (52,270) | | | $ | 217,500 | |
Net income | Net income | | 8,799 | | | 8,799 | | Net income | | 7,138 | | | 7,138 | |
Cash dividends ($0.28 per share) | | (3,824) | | | (3,824) | | |
Issuance of 3,487 common shares pursuant to stock-based compensation plan, net | | (165) | | | 118 | | | (47) | | |
Cash dividends ($0.29 per share) | | Cash dividends ($0.29 per share) | | (3,964) | | | (3,964) | |
Issuance of 19,687 common shares pursuant to stock-based compensation plan, net | | Issuance of 19,687 common shares pursuant to stock-based compensation plan, net | | (807) | | | 871 | | | 64 | |
| Stock-based compensation expense | Stock-based compensation expense | | 1,307 | | | 1,307 | | Stock-based compensation expense | | 927 | | | (18) | | | 909 | |
| Purchase of 63,305 common shares | | Purchase of 63,305 common shares | | (2,377) | | | (2,377) | |
Other comprehensive loss | Other comprehensive loss | | (20,114) | | | (20,114) | | Other comprehensive loss | | (4,124) | | | (4,124) | |
Balance, September 30, 2022 | $ | 7,753 | | | $ | 205,624 | | | $ | 126,361 | | | $ | (81,624) | | | $ | (66,379) | | | $ | 191,735 | | |
Balance, June 30, 2023 | | Balance, June 30, 2023 | $ | 7,753 | | | $ | 206,734 | | | $ | 137,996 | | | $ | (80,943) | | | $ | (56,394) | | | $ | 215,146 | |
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20222023 AND 20212022
(Unaudited)
(Dollars in Thousands except per share data)
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total | |
Balance, December 31, 2020 | $ | 7,753 | | | $ | 204,875 | | | $ | 99,062 | | | $ | (50,515) | | | $ | (15) | | | $ | 261,160 | | |
Net income | | 20,902 | | | 20,902 | | |
Cash dividends ($.81 per share) | | (11,576) | | | (11,576) | | |
Issuance of 83,506 common shares pursuant to stock-based compensation plan, net | | (2,932) | | | 2,180 | | | (752) | | |
Exercise of SARs | | (415) | | | 292 | | | (123) | | |
Stock-based compensation expense | | 2,585 | | | 2,585 | | |
Purchase of 434,938 common shares | | (18,975) | | | (18,975) | | |
Other comprehensive loss | | (5,578) | | | (5,578) | | |
Balance, September 30, 2021 | $ | 7,753 | | | $ | 204,113 | | | $ | 108,388 | | | $ | (67,018) | | | $ | (5,593) | | | $ | 247,643 | | |
| | | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balance, December 31, 2021 | Balance, December 31, 2021 | $ | 7,753 | | | $ | 204,276 | | | $ | 112,220 | | | $ | (78,904) | | | $ | 453 | | | $ | 245,798 | | Balance, December 31, 2021 | $ | 7,753 | | | $ | 204,276 | | | $ | 112,220 | | | $ | (78,904) | | | $ | 453 | | | $ | 245,798 | |
Net income | Net income | | 25,619 | | | 25,619 | | Net income | | 16,820 | | | 16,820 | |
Cash dividends ($.84 per share) | | (11,478) | | | (11,478) | | |
Issuance of 80,396 common shares pursuant to stock-based compensation plan, net | | (2,803) | | | 2,336 | | | (467) | | |
Cash dividends ($.56 per share) | | Cash dividends ($.56 per share) | | (7,654) | | | (7,654) | |
Issuance of 76,909 common shares pursuant to stock-based compensation plan, net | | Issuance of 76,909 common shares pursuant to stock-based compensation plan, net | | (2,638) | | | 2,218 | | | (420) | |
Exercise of SARs | Exercise of SARs | | (328) | | | 243 | | | (85) | | Exercise of SARs | | (328) | | | 243 | | | (85) | |
Stock-based compensation expense | Stock-based compensation expense | | 4,479 | | | 4,479 | | Stock-based compensation expense | | 3,172 | | | 3,172 | |
Purchase of 130,374 common shares | Purchase of 130,374 common shares | | (5,299) | | | (5,299) | | Purchase of 130,374 common shares | | (5,299) | | | (5,299) | |
Other comprehensive loss | Other comprehensive loss | | (66,832) | | | (66,832) | | Other comprehensive loss | | (46,718) | | | (46,718) | |
Balance, September 30, 2022 | $ | 7,753 | | | $ | 205,624 | | | $ | 126,361 | | | $ | (81,624) | | | $ | (66,379) | | | $ | 191,735 | | |
Balance, June 30, 2022 | | Balance, June 30, 2022 | $ | 7,753 | | | $ | 204,482 | | | $ | 121,386 | | | $ | (81,742) | | | $ | (46,265) | | | $ | 205,614 | |
| | Balance, December 31, 2022 | | Balance, December 31, 2022 | $ | 7,753 | | | $ | 207,422 | | | $ | 131,682 | | | $ | (81,211) | | | $ | (59,321) | | | $ | 206,325 | |
Net income | | Net income | | 14,255 | | | 14,255 | |
Cash dividends ($.58 per share) | | Cash dividends ($.58 per share) | | (7,941) | | | (7,941) | |
Issuance of 81,221 common shares pursuant to stock-based compensation plan, net | | Issuance of 81,221 common shares pursuant to stock-based compensation plan, net | | (3,327) | | | 2,541 | | | (786) | |
Exercise of SARs | | Exercise of SARs | | (238) | | | 122 | | | (116) | |
Stock-based compensation expense | | Stock-based compensation expense | | 2,877 | | | (18) | | | 2,859 | |
Purchase of 63,305 common shares | | Purchase of 63,305 common shares | | (2,377) | | | (2,377) | |
Other comprehensive gain | | Other comprehensive gain | | 2,927 | | | 2,927 | |
Balance, June 30, 2023 | | Balance, June 30, 2023 | $ | 7,753 | | | $ | 206,734 | | | $ | 137,996 | | | $ | (80,943) | | | $ | (56,394) | | | $ | 215,146 | |
See accompanying notes to unaudited consolidated financial statements.
CASS INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Certain amounts in prior-period financial statements have been reclassified to conform to the current period’s presentation. Such reclassifications have no effect on previously reported net income or shareholders’ equity. For further information, refer to the audited consolidated financial statements and related footnotes included in Cass Information System, Inc.’s (the “Company” or “Cass”) Annual Report on Form 10-K for the year ended December 31, 2021.2022 ("2022 Form 10-K").
Note 2 – Intangible Assets
The Company accounts for intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Goodwill and Other Intangible Assets, which requires that intangibles with indefinite useful lives be tested annually for impairment, or when management deems there is a triggering event, and those with finite useful lives be amortized over their useful lives.
In June 2022, the Company acquired the assets of mobile church management software developer Touchpoint, a division of the Pursuant Group, Inc., and recorded intangible assets of $5,289,000. Those intangible assets were valued at $3,046,000 for goodwill, $1,692,000 for the customer list, $368,000 for software, and $183,000 for the trade name. The goodwill is deductible for tax purposes over 15 years, starting in 2022. The intangible assets and results of Touchpoint are included in the Information Services operating segment.
The purchase price of the acquisition consisted of a cash payment of $4,900,000 and potential contingent consideration in the form of an earn out up to $2,500,000. The Company valued the contingent earn out component at $389,000. The fair value of the contingent consideration was estimated on the acquisition date as the present value of the expected future contingent payments which were determined using a Monte Carlo simulation. The contingent consideration is based upon four years of earnings before interest, taxes, depreciation and amortization (EBITDA) subsequent to the acquisition date. Any changes in the estimated fair value of the contingent earn out consideration, up to the contracted amount, will be reflected in the results of operations in future periods as they are identified.
Details of the Company’s intangible assets are as follows:
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
(In thousands) | (In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization | (In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Assets eligible for amortization: | Assets eligible for amortization: | | | | | | | | Assets eligible for amortization: | | | | | | | |
Customer lists | Customer lists | $ | 6,470 | | | $ | (4,489) | | | $ | 4,778 | | | $ | (4,341) | | Customer lists | $ | 6,470 | | | $ | (4,706) | | | $ | 6,470 | | | $ | (4,561) | |
Patents | Patents | 72 | | | (31) | | | 72 | | | (28) | | Patents | 72 | | | (34) | | | 72 | | | (32) | |
Software | Software | 3,212 | | | (1,401) | | | 2,844 | | | (1,104) | | Software | 3,212 | | | (1,721) | | | 3,212 | | | (1,508) | |
Trade name | Trade name | 373 | | | (35) | | | 190 | | | (22) | | Trade name | 373 | | | (56) | | | 373 | | | (42) | |
Other | Other | 500 | | | (350) | | | 500 | | | (325) | | Other | 500 | | | (375) | | | 500 | | | (358) | |
Unamortized intangible assets: | Unamortized intangible assets: | | Unamortized intangible assets: | |
Goodwill | Goodwill | 17,309 | | | — | | | 14,262 | | | — | | Goodwill | 17,309 | | | — | | | 17,309 | | | — | |
Total intangible assets | Total intangible assets | $ | 27,936 | | | $ | (6,306) | | | $ | 22,646 | | | $ | (5,820) | | Total intangible assets | $ | 27,936 | | | $ | (6,892) | | | $ | 27,936 | | | $ | (6,501) | |
The customer lists are amortized over 7 to 10 years; the patents over 18 years; software over 3 to 7 years,years; the trade name over 10 to 20 yearsyears; and other intangible assets over 15 years. Amortization of intangible assets amounted to $195,000 and $215,000$155,000 for the three month periods ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Amortization of intangible assets amounted to $485,000$390,000 and $644,000$290,000 for the nine-monthsix-month periods ended SeptemberJune 30, 2023 and 2022, and 2021, respectively.
Estimated annual amortization of intangibles is $680,000 in 2022, $780,000 in 2023, $738,000 in 2024, $730,000 in 2025, and $582,000 in 2026.2026, and $262,000 in 2027.
Note 3 – Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding and the weighted-average number of potential common shares outstanding. Under the treasury stock method, stock appreciation rights (“SARs”) are dilutive when the average market price of the Company’s common stock, combined with the effect of any unamortized compensation expense, exceeds the SAR price during a period.
The calculations of basic and diluted earnings per share are as follows:
| (In thousands except share and per share data) | (In thousands except share and per share data) | Three Months Ended September 30, | | Nine Months Ended September 30, | (In thousands except share and per share data) | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Basic | Basic | | Basic | |
Net income | Net income | $ | 8,799 | | | $ | 6,805 | | | $ | 25,619 | | | $ | 20,902 | | Net income | $ | 7,138 | | | $ | 8,562 | | | $ | 14,255 | | | $ | 16,820 | |
Weighted-average common shares outstanding | Weighted-average common shares outstanding | 13,542,231 | | | 14,040,089 | | | 13,554,169 | | | 14,203,369 | | Weighted-average common shares outstanding | 13,553,346 | | | 13,542,677 | | | 13,576,281 | | | 13,560,237 | |
Basic earnings per share | Basic earnings per share | $ | 0.65 | | | $ | 0.48 | | | $ | 1.89 | | | $ | 1.47 | | Basic earnings per share | $ | 0.53 | | | $ | 0.63 | | | $ | 1.05 | | | $ | 1.24 | |
| | | | |
Diluted | Diluted | | Diluted | |
Net income | Net income | $ | 8,799 | | | $ | 6,805 | | | $ | 25,619 | | | $ | 20,902 | | Net income | $ | 7,138 | | | $ | 8,562 | | | $ | 14,255 | | | $ | 16,820 | |
Weighted-average common shares outstanding | Weighted-average common shares outstanding | 13,542,231 | | | 14,040,089 | | | 13,554,169 | | | 14,203,369 | | Weighted-average common shares outstanding | 13,553,346 | | | 13,542,677 | | | 13,576,281 | | | 13,560,237 | |
Effect of dilutive restricted stock and stock appreciation rights | Effect of dilutive restricted stock and stock appreciation rights | 262,106 | | | 237,080 | | | 252,496 | | | 239,016 | | Effect of dilutive restricted stock and stock appreciation rights | 300,696 | | | 258,864 | | | 282,412 | | | 247,611 | |
Weighted-average common shares outstanding assuming dilution | Weighted-average common shares outstanding assuming dilution | 13,804,337 | | | 14,277,169 | | | 13,806,665 | | | 14,442,385 | | Weighted-average common shares outstanding assuming dilution | 13,854,042 | | | 13,801,541 | | | 13,858,693 | | | 13,807,848 | |
Diluted earnings per share | Diluted earnings per share | $ | 0.64 | | | $ | 0.48 | | | $ | 1.86 | | | $ | 1.45 | | Diluted earnings per share | $ | 0.52 | | | $ | 0.62 | | | $ | 1.03 | | | $ | 1.22 | |
Note 4 – Stock Repurchases
The Company maintains a treasury stock buyback program pursuant to which, in October 2021, the Board of Directors authorized the repurchase of up to 750,000 shares of the Company’s common stock with no expiration date. As of SeptemberJune 30, 2022, 340,7072023, 277,402 shares remained available for repurchase under the program. The Company repurchased 063,305 and 314,6725,500 shares during the three-month periods ended SeptemberJune 30, 2023 and 2022, and 2021,63,305 and 130,374 and 434,938 shares during the nine-monthsix-month periods ended SeptemberJune 30, 20222023 and 2021, respectively.2022. Repurchases may be made in the open market or through negotiated transactions from time to time depending on market conditions.
Note 5 – Industry Segment Information
The services provided by the Company are classified into two reportable segments: Information Services and Banking Services. Each of these segments provides distinct services that are marketed through different channels. They are managed separately due to their unique service and processing requirements.
The Information Services segment provides transportation, energy, telecommunication, and environmental invoice processing and payment services to large corporations as well ascorporations. In addition, this segment provides church management software and on-line generosity services toprimarily for faith-based ministries. The Banking Services segment provides banking services primarily to privately held businesses, restaurant franchises,franchise restaurants, and faith-based ministries, and supportsas well as supporting the banking needs of the Information Services segment.
The Company’s accounting policies for segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on2022 Form 10-K for the year ended December 31, 2021.10-K. Management evaluates segment performance based on tax-equivalized (as defined in the footnote to the chart on the following table) pre-tax income after allocations for corporate expenses. Transactions between segments are accounted for at what management believes to be fair value.
Substantially all revenue originates from, and all long-lived assets are located within, the United States and no revenue from any customer of any segment exceeds 10% of the Company’s consolidated revenue.
Funding sources represent average balances and deposits generated by Information Services and Banking Services and there is no allocation methodology used. SegmentBanking Services interest income is a functiondetermined by actual interest income on loans minus actual interest expense paid on deposits plus/minus an allocation for interest income or expense dependent on the remaining available liquidity of the relative share of average funding sources generated by each segment multiplied by the following rates:
•segment. Information Services – one or more fixed rates depending upon the specific characteristics of the funding source,interest income is determined by multiplying available liquidity by actual yields on short-term investments and
•Banking Services – a variable rate that is based upon the overall performance of the Company’s earning assets. investment securities.
Any difference between total segment interest income and overall total Company interest income is included in Corporate, Eliminations, and Other.
Summarized information about the Company’s operations in each industry segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Information Services | | Banking Services | | Corporate, Eliminations and Other | | Total |
Three Months Ended September 30, 2022: | | | | | | | |
Fee income | $ | 30,418 | | | $ | 811 | | | $ | 555 | | | $ | 31,784 | |
Interest income* | 7,158 | | | 8,733 | | | 1,273 | | | 17,164 | |
Interest expense | — | | | 782 | | | — | | | 782 | |
Intersegment income (expense) | — | | | 1,124 | | | (1,124) | | | — | |
Tax-equivalized pre-tax income* | 5,605 | | | 4,126 | | | 1,565 | | | 11,296 | |
Goodwill | 17,173 | | | 136 | | | — | | | 17,309 | |
Other intangible assets, net | 4,321 | | | — | | | — | | | 4,321 | |
Total assets | 1,196,399 | | | 1,598,519 | | | (184,103) | | | 2,610,815 | |
Average funding sources | 1,139,568 | | | 949,454 | | | — | | | 2,089,022 | |
Three Months Ended September 30, 2021: | | | | | | | |
Fee income | $ | 26,174 | | | $ | 1,065 | | | $ | 338 | | | $ | 27,577 | |
Interest income* | 7,108 | | | 5,440 | | | (361) | | | 12,187 | |
Interest expense | — | | | 287 | | | — | | | 287 | |
Intersegment income (expense) | — | | | 859 | | | (859) | | | — | |
Tax-equivalized pre-tax income* | 6,509 | | | 2,130 | | | (193) | | | 8,446 | |
Goodwill | 14,126 | | | 136 | | | — | | | 14,262 | |
Other intangible assets, net | 2,779 | | | — | | | — | | | 2,779 | |
Total assets | 1,018,710 | | | 1,279,452 | | | (5,176) | | | 2,292,986 | |
Average funding sources | 974,091 | | | 875,997 | | | — | | | 1,850,088 | |
Nine Months Ended September 30, 2022: | | | | | | | |
Fee income | $ | 89,329 | | | $ | 1,847 | | | $ | 1,689 | | | $ | 92,865 | |
Interest income* | 20,175 | | | 22,478 | | | 1,500 | | | 44,153 | |
Interest expense | — | | | 1,344 | | | — | | | 1,344 | |
Intersegment income (expense) | — | | | 3,549 | | | (3,549) | | | — | |
Tax-equivalized pre-tax income* | 20,259 | | | 10,418 | | | 2,359 | | | 33,036 | |
Goodwill | 17,173 | | | 136 | | | — | | | 17,309 | |
Other intangible assets, net | 4,321 | | | — | | | — | | | 4,321 | |
Total assets | 1,196,399 | | | 1,598,519 | | | (184,103) | | | 2,610,815 | |
Average funding sources | 1,082,449 | | | 963,588 | | | — | | | 2,046,037 | |
Nine Months Ended September 30, 2021: | | | | | | | |
Fee income | $ | 77,863 | | | $ | 1,701 | | | $ | 1,175 | | | $ | 80,739 | |
Interest income* | 18,501 | | | 17,754 | | | (1,335) | | | 34,920 | |
Interest expense | — | | | 915 | | | — | | | 915 | |
Intersegment income (expense) | — | | | 2,170 | | | (2,170) | | | — | |
Tax-equivalized pre-tax income* | 18,477 | | | 8,773 | | | (654) | | | 26,596 | |
Goodwill | 14,126 | | | 136 | | | — | | | 14,262 | |
Other intangible assets, net | 2,779 | | | — | | | — | | | 2,779 | |
Total assets | 1,018,710 | | | 1,279,452 | | | (5,176) | | | 2,292,986 | |
Average funding sources | 906,474 | | | 862,142 | | | — | | | 1,768,616 | |
* Presented on a tax-equivalent basis assuming a tax rate of 21% for both 2022 and 2021. The tax-equivalent adjustment was approximately $412,000 and $468,000 for the third quarter of 2022 and 2021, respectively and $1,294,000 and $1,417,000 for the nine months ended September 30, 2022 and 2021, respectively. | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Information Services | | Banking Services | | Corporate, Eliminations and Other | | Total |
Three Months Ended June 30, 2023: | | | | | | | |
Fee income | $ | 31,360 | | | $ | 626 | | | $ | 87 | | | $ | 32,073 | |
Interest income | 9,463 | | | 13,829 | | | (3,584) | | | 19,708 | |
Interest expense | 69 | | | 7,340 | | | (3,715) | | | 3,694 | |
Intersegment income (expense) | (1,062) | | | 1,062 | | | — | | | — | |
Tax-equivalized pre-tax income | 5,873 | | | 2,776 | | | 219 | | | 8,868 | |
Goodwill | 17,173 | | | 136 | | | — | | | 17,309 | |
Other intangible assets, net | 3,735 | | | — | | | — | | | 3,735 | |
Total assets | 1,602,932 | | | 1,150,293 | | | (282,429) | | | 2,470,796 | |
Average funding sources | 1,327,251 | | | 784,068 | | | — | | | 2,111,319 | |
Three Months Ended June 30, 2022: | | | | | | | |
Fee income | $ | 29,660 | | | $ | 717 | | | $ | 274 | | | $ | 30,651 | |
Interest income | 5,778 | | | 9,336 | | | (1,134) | | | 13,980 | |
Interest expense | 34 | | | 328 | | | (23) | | | 339 | |
Intersegment income (expense) | (910) | | | 910 | | | — | | | — | |
Tax-equivalized pre-tax income | 5,980 | | | 5,441 | | | (838) | | | 10,583 | |
Goodwill | 17,173 | | | 136 | | | — | | | 17,309 | |
Other intangible assets, net | 4,516 | | | — | | | — | | | 4,516 | |
Total assets | 1,376,262 | | | 1,086,799 | | | (19,073) | | | 2,443,988 | |
Average funding sources | 1,390,567 | | | 974,681 | | | — | | | 2,365,248 | |
Six Months Ended June 30, 2023: | | | | | | | |
Fee income | $ | 62,437 | | | $ | 1,337 | | | $ | 406 | | | $ | 64,180 | |
Interest income | 18,910 | | | 27,006 | | | (6,066) | | | 39,850 | |
Interest expense | 167 | | | 12,773 | | | (6,002) | | | 6,938 | |
Intersegment income (expense) | (1,976) | | | 1,976 | | | — | | | — | |
Tax-equivalized pre-tax income | 10,864 | | | 6,635 | | | 342 | | | 17,841 | |
Goodwill | 17,173 | | | 136 | | | — | | | 17,309 | |
Other intangible assets, net | 3,735 | | | — | | | — | | | 3,735 | |
Total assets | 1,602,932 | | | 1,150,293 | | | (282,429) | | | 2,470,796 | |
Average funding sources | 1,342,061 | | | 833,207 | | | — | | | 2,175,268 | |
Six Months Ended June 30, 2022: | | | | | | | |
Fee income | $ | 58,844 | | | $ | 1,670 | | | $ | 567 | | | $ | 61,081 | |
Interest income | 10,128 | | | 18,189 | | | (2,211) | | | 26,106 | |
Interest expense | 40 | | | 553 | | | (31) | | | 562 | |
Intersegment income (expense) | (1,674) | | | 1,674 | | | — | | | — | |
Tax-equivalized pre-tax income | 11,870 | | | 10,602 | | | (1,614) | | | 20,858 | |
Goodwill | 17,173 | | | 136 | | | — | | | 17,309 | |
Other intangible assets, net | 4,516 | | | — | | | — | | | 4,516 | |
Total assets | 1,376,262 | | | 1,086,799 | | | (19,073) | | | 2,443,988 | |
Average funding sources | 1,339,769 | | | 970,772 | | | — | | | 2,310,541 | |
Note 6 – Loans by Type
A summary of loans is as follows:
| (In thousands) | (In thousands) | September 30, 2022 | | December 31, 2021 | (In thousands) | June 30, 2023 | | December 31, 2022 |
Commercial and industrial | Commercial and industrial | $ | 539,272 | | | $ | 450,336 | | Commercial and industrial | $ | 534,128 | | | $ | 561,616 | |
Real estate: | Real estate: | | Real estate: | |
Commercial: | Commercial: | | Commercial: | |
Mortgage | Mortgage | 98,088 | | | 108,759 | | Mortgage | 115,335 | | | 108,166 | |
Construction | Construction | 26,284 | | | 24,797 | | Construction | 20,330 | | | 17,874 | |
Faith-based: | Faith-based: | | Faith-based: | |
Mortgage | Mortgage | 365,584 | | | 355,582 | | Mortgage | 376,127 | | | 387,114 | |
Construction | Construction | 7,853 | | | 14,664 | | Construction | 9,928 | | | 8,094 | |
Paycheck Protection Program (“PPP”) | — | | | 6,299 | | |
Other | Other | 20 | | | 130 | | Other | — | | | 42 | |
Total loans | Total loans | $ | 1,037,101 | | | $ | 960,567 | | Total loans | $ | 1,055,848 | | | $ | 1,082,906 | |
The following table presents the aging of loans past due by category at SeptemberJune 30, 20222023 and December 31, 2021:2022:
| | | Performing | | Nonperforming | | | Performing | | Nonperforming | |
(In thousands) | (In thousands) | Current | | 30-59 Days | | 60-89 Days | | 90 Days and Over | | Non- accrual | | Total Loans | (In thousands) | Current | | 30-59 Days | | 60-89 Days | | 90 Days and Over | | Non- accrual | | Total Loans |
September 30, 2022 | | |
June 30, 2023 | | June 30, 2023 | |
Commercial and industrial | Commercial and industrial | $ | 539,272 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 539,272 | | Commercial and industrial | $ | 534,128 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 534,128 | |
Real estate | Real estate | | Real estate | |
Commercial: | Commercial: | | Commercial: | |
Mortgage | Mortgage | 98,088 | | | — | | | — | | | — | | | — | | | 98,088 | | Mortgage | 115,335 | | | — | | | — | | | — | | | — | | | 115,335 | |
Construction | Construction | 26,284 | | | — | | | — | | | — | | | — | | | 26,284 | | Construction | 20,330 | | | — | | | — | | | — | | | — | | | 20,330 | |
Faith-based: | Faith-based: | | Faith-based: | |
Mortgage | Mortgage | 365,584 | | | — | | | — | | | — | | | — | | | 365,584 | | Mortgage | 376,127 | | | — | | | — | | | — | | | — | | | 376,127 | |
Construction | Construction | 7,853 | | | — | | | — | | | — | | | — | | | 7,853 | | Construction | 9,928 | | | — | | | — | | | — | | | — | | | 9,928 | |
PPP | — | | | — | | | — | | | — | | | — | | | — | | |
Other | 20 | | | — | | | — | | | — | | | — | | | 20 | | |
| Total | Total | $ | 1,037,101 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,037,101 | | Total | $ | 1,055,848 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,055,848 | |
December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
Commercial and industrial | Commercial and industrial | $ | 450,336 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 450,336 | | Commercial and industrial | $ | 560,466 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,150 | | | $ | 561,616 | |
Real estate | Real estate | | Real estate | |
Commercial: | Commercial: | | Commercial: | |
Mortgage | Mortgage | 108,759 | | | — | | | — | | | — | | | — | | | 108,759 | | Mortgage | 108,166 | | | — | | | — | | | — | | | — | | | 108,166 | |
Construction | Construction | 24,797 | | | — | | | — | | | — | | | — | | | 24,797 | | Construction | 17,874 | | | — | | | — | | | — | | | — | | | 17,874 | |
Faith-based: | Faith-based: | | Faith-based: | |
Mortgage | Mortgage | 355,582 | | | — | | | — | | | — | | | — | | | 355,582 | | Mortgage | 387,114 | | | — | | | — | | | — | | | — | | | 387,114 | |
Construction | Construction | 14,664 | | | — | | | — | | | — | | | — | | | 14,664 | | Construction | 8,094 | | | — | | | — | | | — | | | — | | | 8,094 | |
PPP | 6,299 | | | — | | | — | | | — | | | — | | | 6,299 | | |
| Other | Other | 130 | | | — | | | — | | | — | | | — | | | 130 | | Other | 42 | | | — | | | — | | | — | | | — | | | 42 | |
Total | Total | $ | 960,567 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 960,567 | | Total | $ | 1,081,756 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,150 | | | $ | 1,082,906 | |
The following table presents the credit exposure of the loan portfolio by internally assigned credit grade as of SeptemberJune 30, 20222023 and December 31, 2021:2022:
| (In thousands) | (In thousands) | Loans Subject to Normal Monitoring1 | | Performing Loans Subject to Special Monitoring2 | | Nonperforming Loans Subject to Special Monitoring2 | | Total Loans | (In thousands) | Loans Subject to Normal Monitoring1 | | Performing Loans Subject to Special Monitoring2 | | Nonperforming Loans Subject to Special Monitoring2 | | Total Loans |
September 30, 2022 | | |
June 30, 2023 | | June 30, 2023 | |
Commercial and industrial | | Commercial and industrial | $ | 523,176 | | | $ | 10,952 | | | $ | — | | | $ | 534,128 | |
Real estate | | Real estate | |
Commercial: | | Commercial: | |
Mortgage | | Mortgage | 115,335 | | | — | | | — | | | 115,335 | |
Construction | | Construction | 20,330 | | | — | | | — | | | 20,330 | |
Faith-based: | | Faith-based: | |
Mortgage | | Mortgage | 369,338 | | | 6,789 | | | — | | | 376,127 | |
Construction | | Construction | 9,928 | | | — | | | — | | | 9,928 | |
| Total | | Total | $ | 1,038,107 | | | $ | 17,741 | | | $ | — | | | $ | 1,055,848 | |
December 31, 2022 | | December 31, 2022 | |
Commercial and industrial | Commercial and industrial | $ | 536,066 | | | $ | 3,206 | | | $ | — | | | $ | 539,272 | | Commercial and industrial | $ | 549,241 | | | $ | 11,225 | | | $ | 1,150 | | | $ | 561,616 | |
Real estate | Real estate | | Real estate | |
Commercial: | Commercial: | | Commercial: | |
Mortgage | Mortgage | 97,558 | | | 530 | | | — | | | 98,088 | | Mortgage | 108,166 | | | — | | | — | | | 108,166 | |
Construction | Construction | 26,284 | | | — | | | — | | | 26,284 | | Construction | 17,874 | | | — | | | — | | | 17,874 | |
Faith-based: | Faith-based: | | Faith-based: | |
Mortgage | Mortgage | 364,627 | | | 957 | | | — | | | 365,584 | | Mortgage | 386,169 | | | 945 | | | — | | | 387,114 | |
Construction | Construction | 7,853 | | | — | | | — | | | 7,853 | | Construction | 8,094 | | | — | | | — | | | 8,094 | |
| Other | Other | 20 | | | — | | | — | | | 20 | | Other | 42 | | | — | | | — | | | 42 | |
Total | Total | $ | 1,032,408 | | | $ | 4,693 | | | $ | — | | | $ | 1,037,101 | | Total | $ | 1,069,586 | | | $ | 12,170 | | | $ | 1,150 | | | $ | 1,082,906 | |
December 31, 2021 | | |
Commercial and industrial | $ | 440,607 | | | $ | 9,729 | | | $ | — | | | $ | 450,336 | | |
Real estate | | |
Commercial: | | |
Mortgage | 108,759 | | | — | | | — | | | 108,759 | | |
Construction | 24,797 | | | — | | | — | | | 24,797 | | |
Faith-based: | | |
Mortgage | 352,717 | | | 2,865 | | | — | | | 355,582 | | |
Construction | 14,664 | | | — | | | — | | | 14,664 | | |
PPP | 6,299 | | | — | | | — | | | 6,299 | | |
Other | 130 | | | — | | | — | | | 130 | | |
Total | $ | 947,973 | | | $ | 12,594 | | | $ | — | | | $ | 960,567 | | |
| | |
1 Loans subject to normal monitoring involve borrowers of acceptable-to-strong credit quality and risk, who have the apparent ability to satisfy their loan obligations. |
2 Loans subject to special monitoring possess some credit deficiency or potential weakness which requires a high level of management attention. |
The Company adopted Accounting Standards Update ("ASU") 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02") effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. In some cases, these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, a term extension, or a combination thereof, among other things.
The following table shows the amortized cost of loans at June 30, 2023 that were both experiencing financial difficulty and modified during the six months ended June 30, 2023, segregated by category and type of modification.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Payment Delay | | Term Extension | | Interest Rate Reduction | | Combination Term Extension and Interest Rate Reduction | | Percentage of Total Loans Held for Investment |
June 30, 2023 | | | | | | | | | |
Commercial and industrial | $ | — | | | $ | 10,952 | | | $ | — | | | $ | — | | | 2.05 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total | $ | — | | | $ | 10,952 | | | $ | — | | | $ | — | | | 1.04 | % |
There were two loans modified during the six months ended June 30, 2023. The terms were extended by periods of two and three years and there was not an interest rate reduction associated with the modifications.
The following table shows the performance of loans that have been modified to borrowers experiencing financial difficulty during the six months ended June 30, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due |
June 30, 2023 | | | | | | | | | |
Commercial and industrial | $ | 10,952 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total | $ | 10,952 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
There were no modified loans that had a payment default during the six months ended June 30, 2023 and that had been modified due to the borrower experiencing financial difficulty within the 12 previous months preceding the default.
Upon the Company's determination that a modified loan has subsequently been deemed uncollectible, the loan is written off. There were no loans written off during the six months ended June 30, 2023.
Prior to the adoption of ASU 2022-02, there were no loans considered troubled debt restructurings as of June 30, 2022 or December 31, 2022.
The Company had no loans evaluated for expected credit losses on an individual basis as of SeptemberJune 30, 2022 or2023. The Company had one loan that was considered an individually evaluated credit at December 31, 2021.2022, with no specific allowance. This
loan was paid off in full in January 2023. There were no foreclosed loans recorded as other real estate owned as of SeptemberJune 30, 20222023 or December 31, 2021. There were no loans considered troubled debt restructurings as of September 30, 2022 or December 31, 2021.
A summary of the activity in the allowance for credit losses (“ACL”) by category for the periodssix month period ended SeptemberJune 30, 20222023 and year-ended December 31, 20212022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | C&I | | CRE | | Faith-based CRE | | Construction | | Total |
Balance at December 31, 2020 | $ | 4,635 | | | $ | 1,175 | | | $ | 5,717 | | | $ | 417 | | | $ | 11,944 | |
Provision for (release of) credit losses | 387 | | | (144) | | | (48) | | | (125) | | | 70 | |
Recoveries | 12 | | | — | | | 15 | | | — | | | 27 | |
Balance at December 31, 2021 | $ | 5,034 | | | $ | 1,031 | | | $ | 5,684 | | | $ | 292 | | | $ | 12,041 | |
| | | | | | | | | |
Provision for (release of) credit losses | 919 | | | (129) | | | 259 | | | (53) | | | 996 | |
Recoveries | 12 | | | — | | | — | | | — | | | 12 | |
Balance at September 30, 2022 | $ | 5,965 | | | $ | 902 | | | $ | 5,943 | | | $ | 239 | | | $ | 13,049 | |
The provision for credit losses during the period ended September 30, 2022 was primarily driven by growth of the loan portfolio. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | C&I | | CRE | | Faith-based CRE | | Construction | | Total |
Balance at December 31, 2021 | $ | 5,034 | | | $ | 1,031 | | | $ | 5,684 | | | $ | 292 | | | $ | 12,041 | |
Provision for (release of) credit losses | 931 | | | (91) | | | 753 | | | (108) | | | 1,485 | |
Recoveries | 13 | | | — | | | — | | | — | | | 13 | |
Balance at December 31, 2022 | $ | 5,978 | | | $ | 940 | | | $ | 6,437 | | | $ | 184 | | | $ | 13,539 | |
| | | | | | | | | |
(Release of) provision for credit losses (1) | (282) | | | 42 | | | (130) | | | 25 | | | (345) | |
Recoveries | — | | | — | | | — | | | — | | | — | |
Balance at June 30, 2023 | $ | 5,696 | | | $ | 982 | | | $ | 6,307 | | | $ | 209 | | | $ | 13,194 | |
| | | | | |
(1) | For the six month period ended June 30, 2023 and year-ended December 31, 2022, there was a release of credit losses of $115,000 and $135,000, respectively, for unfunded commitments. |
Note 7 – Commitments and Contingencies
In the normal course of business, the Company is party to activities that contain credit, market and operational risks that are not reflected in whole or in part in the Company’s consolidated financial statements. SuchAs more fully described in the Form 10-K, such activities include traditional off-balance sheet credit-related financial instruments and commitments under operating leases. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. The Company’s maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, commercial letters of credit and standby letters of credit is represented by the contractual amounts of those instruments. An allowance for unfunded commitments of $222,000 and $367,000 had been recorded at September 30, 2022 and December 31, 2021, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commercial and standby letters of credit are conditional commitments issued by the Company or its subsidiaries to guarantee the performance of a customer to a third party. These off-balance sheet financial instruments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At September 30, 2022, the balances of unfunded commitments, standby and commercial letters of credit were $207,883,000, $13,450,000, and $1,633,000, respectively. Since some of the financial instruments may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Commitments to extend credit and letters of credit are subject to the same underwriting standards as those financial instruments included on the consolidated balance sheets. The Company evaluates each customer’sAn allowance for unfunded commitments of $117,000 and $232,000 had been recorded at June 30, 2023 and December 31, 2022, respectively.
At June 30, 2023, the balances of unfunded commitments, standby and commercial letters of credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extensionwere $198.2 million, $14.0 million, and $822,000, respectively. Since some of the credit, is based on management’s credit evaluation offinancial instruments may expire without being drawn upon, the borrower. Collateral held varies, but is generally accounts receivable, inventory, residential or income-producing commercial property or equipment. In the event of nonperformance, the Company or its subsidiaries may obtain and liquidate the collateral to recovertotal amounts paid under guarantees on these financial instruments.do not necessarily represent future cash requirements.
Note 8 – Stock-Based Compensation
TheStock-based compensation awards have historically been issued under the Company's Amended and Restated Omnibus Stock and Performance Compensation Plan (the “Omnibus Plan”"Prior Plan") permits the issuance of up to 1,500,000 shares of the Company’s common stock, which was amended and last approved by shareholders in the form of stock options, SARs, restricted stock, restricted stock units and performance awards.2013. The Company may issueissued shares out of treasury stock for these awards.awards until the expiration of the Prior Plan on April 17, 2023. During the ninesix months ended SeptemberJune 30, 2022, 62,375 restricted shares, 57,542 performance-based2023, 35,035 restricted shares and no SARs48,262 performance-based restricted shares were granted under the Prior Plan.
On February 16, 2023, the Board of Directors adopted the 2023 Omnibus Stock and Performance Compensation Plan (the "2023 Omnibus Plan") to replace the Prior Plan, subject to shareholder approval which occurred on April 18, 2023. Subsequent to this date, the Company will issue stock-based compensation awards under the 2023 Omnibus Plan. During the six months ended June 30, 2023, 19,687 restricted shares and 3,191 performance-based restricted shares were granted under the 2023 Omnibus Plan.
Stock-based compensation expense for the three months ended SeptemberJune 30, 2023 and 2022 was $909,000 and 2021 was $1,307,000 and $1,066,000,$2.1 million, respectively, and $4,479,000$2.9 million and $2,585,000$3.2 million for the ninesix months ended SeptemberJune 30, 20222023 and 2021, respectively.2022.
Restricted Stock
Restricted shares granted to Company employees are amortized to expense over a three-year cliff vesting period, or until vesting occurs upon retirement. Restricted shares granted to members of the Board of Directors are amortized to expense over a one-year service period, with the exception of those shares granted in lieu of cash payments for retainer fees which are expensed in the period earned.
As of SeptemberJune 30, 2022,2023, the total unrecognized compensation expense related to non-vested restricted shares was $2,239,000,$2.4 million, and the related weighted-average period over which it is expected to be recognized is approximately 0.740.77 years.
Following is a summary of the activity of the Company's restricted stock for the ninesix months ended SeptemberJune 30, 2022,2023, with total shares and weighted-average fair value:
| | | Nine Months Ended September 30, 2022 | | Six Months Ended June 30, 2023 |
| | Shares | | Fair Value | | Shares | | Fair Value |
Balance at December 31, 2021 | 165,553 | | | $ | 44.81 | | |
Balance at December 31, 2022 | | Balance at December 31, 2022 | 205,565 | | | $ | 42.64 | |
Granted | Granted | 62,375 | | | 39.17 | | Granted | 54,722 | | | 44.78 | |
Vested | Vested | (23,316) | | | 48.85 | | Vested | (21,691) | | | 53.16 | |
Forfeitures | Forfeitures | (823) | | | 43.89 | | Forfeitures | (398) | | | 40.15 | |
Balance at September 30, 2022 | 203,789 | | | $ | 42.63 | | |
Balance at June 30, 2023 | | Balance at June 30, 2023 | 238,198 | | | $ | 42.18 | |
Performance-Based Restricted Stock
The Company has granted three-year performance-based restricted stock (“PBRS”) awards which are contingent upon the Company’s achievement of pre-established financial goals over a three-year cliff vest period. The number of shares issued ranges from 0% to 150% of the target opportunity based on the actual achievement of financial goals for the three-year performance period.
Following is a summary of the activity of the PBRS for the ninesix months ended SeptemberJune 30, 2022,2023, based on 100% of target value:
| | | Nine Months Ended September 30, 2022 | | Six Months Ended June 30, 2023 |
| | Shares | | Fair Value | | Shares | | Fair Value |
Balance at December 31, 2021 | 116,543 | | | $ | 46.79 | | |
Balance at December 31, 2022 | | Balance at December 31, 2022 | 138,785 | | | $ | 43.19 | |
Granted | Granted | 57,542 | | | 39.58 | | Granted | 51,453 | | | 48.19 | |
Vested | Vested | (34,066) | | | 49.05 | | Vested | (30,567) | | | 54.02 | |
Forfeitures | Forfeitures | (1,234) | | | 43.89 | | Forfeitures | (598) | | | 40.15 | |
Balance at September 30, 2022 | 138,785 | | | $ | 43.19 | | |
Balance at June 30, 2023 | | Balance at June 30, 2023 | 159,073 | | | $ | 42.74 | |
The PBRS that vested during the ninesix months ended SeptemberJune 30, 20222023 were based on the Company's achievement of 52.9%86.7% of target financial goals, resulting in the issuance of 18,02126,499 shares of common stock. The outstanding PBRS at SeptemberJune 30, 20222023 will vest at scheduled vesting dates and the actual number of shares of common stock issued will range from 0% to 150% of the target opportunity based on the actual achievement of financial goals for the respective three-year performance period.
SARs
There were no SARs granted and no expense recognized during the ninesix months ended SeptemberJune 30, 2022.2023. Following is a summary of the activity of the Company’s SARs program for the ninesix months ended SeptemberJune 30, 2022:2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted- Average Exercise Price | | Average Remaining Contractual Term Years | | Aggregate Intrinsic Value (In thousands) |
Balance at December 31, 2021 | 117,089 | | | $ | 34.91 | | | 1.21 | | $ | 741 | |
Exercised | (23,976) | | | 27.78 | | | — | | | — | |
| | | | | | | |
Exercisable at September 30, 2022 | 93,113 | | | $ | 36.75 | | | 0.65 | | $ | 174 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted- Average Exercise Price | | Average Remaining Contractual Term Years | | Aggregate Intrinsic Value (In thousands) |
Balance at December 31, 2022 | 46,325 | | | $ | 41.62 | | | 0.73 | | $ | 192 | |
Exercised | (15,916) | | | 31.92 | | | — | | | — | |
| | | | | | | |
Exercisable at June 30, 2023 | 30,409 | | | $ | 46.70 | | | 0.59 | | $ | — | |
ThereAll SARs were no non-vested SARsvested at SeptemberJune 30, 2022.2023.
Note 9 – Defined Pension Plans
The Company has a noncontributory defined-benefit pension plan (the “Plan”), which covers eligible employees. Effective December 31, 2016, the Plan was closed to all new participants. Additionally, the Plan’s benefits were frozen for all remaining participants as of February 28, 2021. As such, subsequent to February 28, 2021, there is no service cost associated with the Plan. The Company accrues and makes contributions designed to fund normal service costs on a current basis using the projected unit credit with service proration method to amortize prior service costs arising from improvements in pension benefits and qualifying service prior to the establishment of the plan over a period of approximately 30 years. Disclosure information is based on a measurement date of December 31 of the corresponding year. The following table represents the components of the net periodic pension costs:cost (benefit):
| (In thousands) | (In thousands) | Estimated 2022 | | Actual 2021 | (In thousands) | Estimated 2023 | | Actual 2022 |
Service cost – benefits earned during the year | $ | — | | | $ | 1,002 | | |
| Interest cost on projected benefit obligations | Interest cost on projected benefit obligations | 3,290 | | | 3,076 | | Interest cost on projected benefit obligations | $ | 4,375 | | | $ | 3,293 | |
Expected return on plan assets | Expected return on plan assets | (5,860) | | | (6,310) | | Expected return on plan assets | (3,977) | | | (5,857) | |
Net amortization | — | | | 393 | | |
Net periodic pension benefit | $ | (2,570) | | | $ | (1,839) | | |
| Net periodic pension cost (benefit) | | Net periodic pension cost (benefit) | $ | 398 | | | $ | (2,564) | |
The Company recorded a net periodic benefitpension cost of $616,000$138,000 and $1,847,000$273,000 for the three and nine-month periodssix month period ended SeptemberJune 30, 2022,2023, respectively, and $678,000a net periodic pension benefit of $613,000 and $1,096,000$1.2 million for the three and nine-monthsix month period ended September 30, 2021, respectively. The net periodic pension benefit increased during the nine-month period ended SeptemberJune 30, 2022, primarily due to the Plan being frozen as of February 28, 2021.respectively. The Company made no contributions to the Plan during the nine-monthsix month period ended SeptemberJune 30, 20222023 and is evaluating the amount of contributions, if any, for the remainder of 2022.2023.
In addition to the above funded benefitdefined-benefit pension plan, the Company has an unfunded supplemental executive retirement plan which covers key executives of(the "SERP"). There are no current employees earning benefits and therefore, there is no service cost associated with the Company. This is a noncontributory plan in which the Company and its subsidiaries make accruals designed to fund normal service costs on a current basis using the same method and criteria as its defined benefit plan.SERP. The following table represents the components of the net periodic pension costscost for 2021 and an estimate for 2022:the SERP:
| (In thousands) | (In thousands) | Estimated 2022 | | Actual 2021 | (In thousands) | Estimated 2023 | | Actual 2022 |
Service cost – benefits earned during the year | $ | — | | | $ | 147 | | |
| Interest cost on projected benefit obligation | Interest cost on projected benefit obligation | 318 | | | 291 | | Interest cost on projected benefit obligation | $ | 472 | | | $ | 318 | |
Net amortization | Net amortization | 108 | | | 203 | | Net amortization | — | | | 108 | |
Net periodic pension cost | Net periodic pension cost | $ | 426 | | | $ | 641 | | Net periodic pension cost | $ | 472 | | | $ | 426 | |
Supplemental executive retirement plan costsSERP cost recorded to expense were $107,000was $118,000 and $320,000$236,000 for the three and nine-monthsix month periods ended SeptemberJune 30, 2022,2023, respectively, and $160,000$106,000 and $481,000$213,000 for the three and nine-monthsix month periods ended SeptemberJune 30, 2021,2022, respectively.
Note 10 – Income Taxes
The effective tax rate was 19.2%19.5% and 19.3%20.1% for the three and nine-monthsix month periods ended SeptemberJune 30, 2022,2023, respectively, and 14.7%19.1% and 17.0%19.4% for the three and nine-monthsix month periods ended SeptemberJune 30, 2021,2022, respectively. The effective tax rate for all periods differs from the statutory rate of 21% primarily due to the tax-exempt interest received from municipal bonds and bank-owned life insurance, among other factors. The increase in the effective tax rate for the nine-monthsix month period ended SeptemberJune 30, 20222023 as compared to the same period of 20212022 is primarily a result of taxable income being higher in the current period, which reduces the relative impact of thelower tax-exempt income.
Note 11 – Investment in Securities
Investment securities available-for-sale are recorded at fair value on a recurring basis. The Company’s investment securities available-for-sale are measured at fair value using Level 2 valuations. The market evaluation utilizes several sources which include “observable inputs” rather than “significant unobservable inputs” and therefore fall into the Level 2
category. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities are summarized as follows:
| | | September 30, 2022 | | June 30, 2023 |
(In thousands) | (In thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | (In thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
State and political subdivisions | State and political subdivisions | $ | 326,506 | | | $ | 18 | | | $ | 28,078 | | | $ | 298,446 | | State and political subdivisions | $ | 243,231 | | | $ | 1 | | | $ | 19,799 | | | $ | 223,433 | |
Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 210,111 | | | — | | | 31,978 | | | 178,133 | | Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 196,521 | | | — | | | 32,669 | | | 163,852 | |
Corporate bonds | Corporate bonds | 96,405 | | | — | | | 12,614 | | | 83,791 | | Corporate bonds | 111,231 | | | — | | | 10,068 | | | 101,163 | |
U.S. treasury bonds | 158,623 | | | — | | | 3,504 | | | 155,119 | | |
Treasury securities | | Treasury securities | 109,666 | | | — | | | 2,770 | | | 106,896 | |
Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 50,136 | | | — | | | 1,836 | | | 48,300 | | Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 43,729 | | | — | | | 1,560 | | | 42,169 | |
Total | Total | $ | 841,781 | | | $ | 18 | | | $ | 78,010 | | | $ | 763,789 | | Total | $ | 704,378 | | | $ | 1 | | | $ | 66,866 | | | $ | 637,513 | |
| | | December 31, 2021 | | December 31, 2022 |
(In thousands) | (In thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | (In thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
State and political subdivisions | State and political subdivisions | $ | 359,187 | | | $ | 12,931 | | | $ | 990 | | | $ | 371,128 | | State and political subdivisions | $ | 317,376 | | | $ | 54 | | | $ | 22,304 | | | $ | 295,126 | |
Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 170,711 | | | 135 | | | 2,200 | | | 168,646 | | Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 205,175 | | | — | | | 31,236 | | | 173,939 | |
Corporate bonds | Corporate bonds | 84,538 | | | 72 | | | 272 | | | 84,338 | | Corporate bonds | 96,348 | | | — | | | 11,251 | | | 85,097 | |
Treasury securities | | Treasury securities | 158,935 | | | — | | | 3,652 | | | 155,283 | |
Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 49,835 | | | — | | | 494 | | | 49,341 | | Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 47,213 | | | — | | | 2,190 | | | 45,023 | |
Total | Total | $ | 664,271 | | | $ | 13,138 | | | $ | 3,956 | | | $ | 673,453 | | Total | $ | 825,047 | | | $ | 54 | | | $ | 70,633 | | | $ | 754,468 | |
The fair values of securities with unrealized losses are as follows:
| | | September 30, 2022 | | June 30, 2023 |
| | Less than 12 months | | 12 months or more | | Total | | Less than 12 months | | 12 months or more | | Total |
(In thousands) | (In thousands) | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | (In thousands) | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
State and political subdivisions | State and political subdivisions | $ | 246,743 | | | $ | 19,158 | | | $ | 30,025 | | | $ | 8,920 | | | $ | 276,768 | | | $ | 28,078 | | State and political subdivisions | $ | 104,329 | | | $ | 1,171 | | | $ | 118,103 | | | $ | 18,628 | | | $ | 222,432 | | | $ | 19,799 | |
Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 119,478 | | | 18,240 | | | 58,655 | | | 13,738 | | | 178,133 | | | 31,978 | | Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 11,581 | | | 608 | | | 152,271 | | | 32,061 | | | 163,852 | | | 32,669 | |
Corporate bonds | Corporate bonds | 72,280 | | | 11,075 | | | 6,511 | | | 1,539 | | | 78,791 | | | 12,614 | | Corporate bonds | 14,846 | | | 155 | | | 81,318 | | | 9,913 | | | 96,164 | | | 10,068 | |
U.S. treasury bonds | 155,119 | | | 3,504 | | | — | | | — | | | 155,119 | | | 3,504 | | |
Treasury securities | | Treasury securities | 9,656 | | | 247 | | | 97,240 | | | 2,523 | | | 106,896 | | | 2,770 | |
Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 48,300 | | | 1,836 | | | — | | | — | | | 48,300 | | | 1,836 | | Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | — | | | — | | | 42,169 | | | 1,560 | | | 42,169 | | | 1,560 | |
Total | Total | $ | 641,920 | | | $ | 53,813 | | | $ | 95,191 | | | $ | 24,197 | | | $ | 737,111 | | | $ | 78,010 | | Total | $ | 140,412 | | | $ | 2,181 | | | $ | 491,101 | | | $ | 64,685 | | | $ | 631,513 | | | $ | 66,866 | |
| | | December 31, 2021 | | December 31, 2022 |
| | Less than 12 months | | 12 months or more | | Total | | Less than 12 months | | 12 months or more | | Total |
(In thousands) | (In thousands) | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | (In thousands) | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses |
State and political subdivisions | State and political subdivisions | $ | 60,083 | | | $ | 990 | | | $ | — | | | $ | — | | | $ | 60,083 | | | $ | 990 | | State and political subdivisions | $ | 214,919 | | | $ | 8,958 | | | $ | 47,474 | | | $ | 13,346 | | | $ | 262,393 | | | $ | 22,304 | |
Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 163,652 | | | 2,200 | | | — | | | — | | | 163,652 | | | 2,200 | | Mortgage-backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 53,732 | | | 6,135 | | | 118,017 | | | 25,101 | | | 171,749 | | | 31,236 | |
Corporate bonds | Corporate bonds | 55,120 | | | 272 | | | — | | | — | | | 55,120 | | | 272 | | Corporate bonds | 32,517 | | | 3,629 | | | 47,580 | | | 7,622 | | | 80,097 | | | 11,251 | |
Treasury securities | | Treasury securities | 155,283 | | | 3,652 | | | — | | | — | | | 155,283 | | | 3,652 | |
Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | 49,341 | | | 494 | | | — | | | — | | | 49,341 | | | 494 | | Asset backed securities issued or guaranteed by U.S. government agencies or sponsored enterprises | — | | | — | | | 47,213 | | | 2,190 | | | 47,213 | | | 2,190 | |
Total | Total | $ | 328,196 | | | $ | 3,956 | | | $ | — | | | $ | — | | | $ | 328,196 | | | $ | 3,956 | | Total | $ | 456,451 | | | $ | 22,374 | | | $ | 260,284 | | | $ | 48,259 | | | $ | 716,735 | | | $ | 70,633 | |
There were 326280 securities, or 93% (4498.9% (183 of which for greater than 12 months), in an unrealized loss position as of SeptemberJune 30, 2022.2023. The unrealized losses at SeptemberJune 30, 20222023 were primarily attributable to changes in market interest rates after the securities were purchased. The Company does not currently intend to sell and, based on current conditions, the Company does not believe it will be required to sell these available-for-sale securities before the recovery of the amortized cost basis, which may be the maturity dates of the securities. Therefore, the unrealized losses are recorded in accumulated other comprehensive loss. There were 101311 securities, or 28% (091.7% (101 of which for greater than 12 months), in an unrealized loss position as of December 31, 2021.2022. At SeptemberJune 30, 20222023 and December 31, 2021,2022, the Company had not recorded an allowance for credit losses on securities.
The amortized cost and fair value of investment securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
| | | September 30, 2022 | | June 30, 2023 |
(In thousands) | (In thousands) | Amortized Cost | | Fair Value | (In thousands) | Amortized Cost | | Fair Value |
Due in 1 year or less | Due in 1 year or less | $ | 65,238 | | | $ | 64,875 | | Due in 1 year or less | $ | 114,522 | | | $ | 111,901 | |
Due after 1 year through 5 years | Due after 1 year through 5 years | 267,021 | | | 260,368 | | Due after 1 year through 5 years | 144,547 | | | 141,874 | |
Due after 5 years through 10 years | Due after 5 years through 10 years | 231,748 | | | 203,575 | | Due after 5 years through 10 years | 205,751 | | | 179,827 | |
Due after 10 years | Due after 10 years | 277,774 | | | 234,971 | | Due after 10 years | 239,558 | | | 203,911 | |
Total | Total | $ | 841,781 | | | $ | 763,789 | | Total | $ | 704,378 | | | $ | 637,513 | |
Proceeds from sales of investment securities classified as available-for-sale were $2,317,000$49.6 million and $3,838,000$111.1 million for the three and ninesix months ended SeptemberJune 30, 2023 and $1.5 million for both the three and six months ended June 30, 2022, respectively. Gross realized losses were $199,000 and $30,074,000 and $43,190,000$347,000 for the three and ninesix months ended SeptemberJune 30, 2021, respectively.2023, respectively, and there were no gross realized losses for both the three and six months ended June 30, 2022. Gross realized gains were $13,000$0 and $15,000$187,000 for the three and ninesix months ended SeptemberJune 30, 2022. Gross realized losses2023, respectively, and were $1,000$2,000 for both the three and six months ended SeptemberJune 30, 2021 while for the nine months ended September 30, 2021, there were gross realized gains of $44,000.2022. There were no securities pledged to secure public deposits or for other purposes at SeptemberJune 30, 2022.2023.
Note 12 – Fair Value of Financial Instruments
Following is a summary of the carrying amounts and fair values of the Company’s financial instruments:
| | | September 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
(In thousands) | (In thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | (In thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Balance sheet assets: | Balance sheet assets: | | Balance sheet assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 346,994 | | | $ | 346,994 | | | $ | 514,928 | | | $ | 514,928 | | Cash and cash equivalents | $ | 270,473 | | | $ | 270,473 | | | $ | 200,942 | | | $ | 200,942 | |
Investment securities | Investment securities | 763,789 | | | 763,789 | | | 673,453 | | | 673,453 | | Investment securities | 637,513 | | | 637,513 | | | 754,468 | | | 754,468 | |
Loans, net | Loans, net | 1,024,052 | | | 972,338 | | | 948,526 | | | 948,701 | | Loans, net | 1,042,654 | | | 993,935 | | | 1,069,367 | | | 1,004,682 | |
Accrued interest receivable | Accrued interest receivable | 7,609 | | | 7,609 | | | 6,799 | | | 6,799 | | Accrued interest receivable | 7,790 | | | 7,790 | | | 8,297 | | | 8,297 | |
Total | Total | $ | 2,142,444 | | | $ | 2,090,730 | | | $ | 2,143,706 | | | $ | 2,143,881 | | Total | $ | 1,958,430 | | | $ | 1,909,711 | | | $ | 2,033,074 | | | $ | 1,968,389 | |
Balance sheet liabilities: | Balance sheet liabilities: | | Balance sheet liabilities: | |
Deposits | Deposits | $ | 1,229,721 | | | $ | 1,229,721 | | | $ | 1,221,503 | | | $ | 1,221,503 | | Deposits | $ | 1,191,434 | | | $ | 1,191,434 | | | $ | 1,257,217 | | | $ | 1,257,217 | |
Accounts and drafts payable | Accounts and drafts payable | 1,146,334 | | | 1,146,334 | | | 1,050,396 | | | 1,050,396 | | Accounts and drafts payable | 1,021,524 | | | 1,021,524 | | | 1,067,600 | | | 1,067,600 | |
Accrued interest payable | Accrued interest payable | 46 | | | 46 | | | 16 | | | 16 | | Accrued interest payable | 307 | | | 307 | | | 66 | | | 66 | |
Total | Total | $ | 2,376,101 | | | $ | 2,376,101 | | | $ | 2,271,915 | | | $ | 2,271,915 | | Total | $ | 2,213,265 | | | $ | 2,213,265 | | | $ | 2,324,883 | | | $ | 2,324,883 | |
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents - The carrying amount approximates fair value.
Investment in Securities - The fair value is measured on a recurring basis using Level 2 valuations. Refer to Note 11, “Investment in Securities,” for fair value and unrealized gains and losses by investment type.
Loans - The fair value is estimated using present values of future cash flows discounted at risk-adjusted interest rates for each loan category designated by management and is therefore a Level 3 valuation. Management believes that the risk factor embedded in the interest rates along with the allowance for credit losses result in a fair valuation.
Accrued Interest Receivable - The carrying amount approximates fair value.
Deposits - The fair value of demand deposits, savings deposits and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities and therefore, is a Level 2 valuation. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market or the benefit derived from the customer relationship inherent in existing deposits.
Accounts and Drafts Payable - The carrying amount approximates fair value.
Accrued Interest Payable - The carrying amount approximates fair value.
Note 13 – Revenue from Contracts with Customers
Revenue is recognized as the obligation to the customer is satisfied. The following is detail of the Company’s revenue from contracts with clients.
Processing fees – The Company earns fees on a per-item or monthly basis for the invoice processing services rendered on behalf of customers. Per-item fees are recognized at the point in time when the performance obligation is satisfied. Monthly fees are earned over the course of a month, representing the period over which the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.
Financial fees – The Company earns fees on a transaction level basis for invoice payment services when making customer payments. Fees are recognized at the point in time when the payment transactions are made, which is when the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.
Bank service fees – Revenue from service fees consists of service charges and fees on deposit accounts under depository agreements with customers to provide access to deposited funds. Service charges on deposit accounts are transaction-based fees that are recognized at the point in time when the performance obligation is satisfied. Service charges are recognized on a monthly basis representing the period over which the performance obligation is satisfied. The contracts have no significant impact of variable consideration and no significant financing components.
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
(In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | 2023 | | 2022 | | 2023 | | 2022 |
Fee revenue and other income | Fee revenue and other income | | Fee revenue and other income | |
In-scope of FASB ASC 606 | In-scope of FASB ASC 606 | | In-scope of FASB ASC 606 | |
Processing fees | Processing fees | $ | 18,964 | | | $ | 18,461 | | | $ | 57,184 | | | $ | 55,882 | | Processing fees | $ | 19,386 | | | $ | 19,184 | | | $ | 38,899 | | | $ | 38,220 | |
Financial fees | Financial fees | 11,252 | | | 8,624 | | | 32,406 | | | 23,122 | | Financial fees | 11,662 | | | 10,623 | | | 22,921 | | | 21,155 | |
Information services payment and processing revenue | Information services payment and processing revenue | 30,216 | | | 27,085 | | | 89,590 | | | 79,004 | | Information services payment and processing revenue | 31,048 | | | 29,807 | | | 61,820 | | | 59,375 | |
Bank service fees | Bank service fees | 289 | | | 323 | | | 1,142 | | | 991 | | Bank service fees | 253 | | | 423 | | | 517 | | | 852 | |
Fee revenue (in-scope of FASB ASC 606) | Fee revenue (in-scope of FASB ASC 606) | 30,505 | | | 27,408 | | | 90,732 | | | 79,995 | | Fee revenue (in-scope of FASB ASC 606) | 31,301 | | | 30,230 | | | 62,337 | | | 60,227 | |
Other income (out-of-scope of FASB ASC 606) | Other income (out-of-scope of FASB ASC 606) | 1,279 | | | 169 | | | 2,133 | | | 744 | | Other income (out-of-scope of FASB ASC 606) | 772 | | | 421 | | | 1,843 | | | 854 | |
Total fee revenue and other income | Total fee revenue and other income | $ | 31,784 | | | $ | 27,577 | | | $ | 92,865 | | | $ | 80,739 | | Total fee revenue and other income | $ | 32,073 | | | $ | 30,651 | | | $ | 64,180 | | | $ | 61,081 | |
Note 14 – Leases
The Company leases certain premises under operating leases. As of SeptemberJune 30, 2022,2023, the Company had lease liabilities of $9,759,000$9.0 million and right-of-use assets of $9,435,000.$8.6 million. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. Presented within occupancy expense on the Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 2022,2023, operating lease cost was $386,000$345,000 and $1,184,000,$702,000, respectively, short-term lease cost was $51,000$73,000 and $156,000,$126,000, respectively, and there was no variable lease cost. At SeptemberJune 30, 2022,2023, the weighted-average remaining lease term for the operating leases was 8.47.8 years and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.59%3.58%. Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the lease liabilities as they are not reasonably certain to be exercised. See the Company’s 2021 Annual Report on2022 Form 10-K for information regarding these commitments.
A maturity analysis of operating lease liabilities and undiscounted cash flows as of SeptemberJune 30, 20222023 is as follows:
| | | | | |
(In thousands) | SeptemberJune 30,
20222023 |
Lease payments due | |
Less than 1 year | $ | 1,3591,337 | |
1-2 years | 1,3321,333 | |
2-3 years | 1,3391,359 | |
3-4 years | 1,3541,343 | |
4-5 years | 1,3501,370 | |
Over 5 years | 4,5613,531 | |
Total undiscounted cash flows | 11,29510,273 | |
Discount on cash flows | 1,5361,280 | |
Total lease liability | $ | 9,7598,993 | |
There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the ninesix months ended SeptemberJune 30, 2022.
Note 15 – Subsequent Events
In accordance with FASB ASC 855, Subsequent Events, the Company has evaluated subsequent events after the consolidated balance sheet date of SeptemberJune 30, 2022.2023. There were no events identified that would require additional disclosures to prevent the Company’s unaudited consolidated financial statements from being misleading.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Cass Information Systems, Inc. ("Cass" or the "Company") provides payment and information processing services to large manufacturing, distribution and retail enterprises from its offices/locations in St. Louis, Missouri, Columbus, Ohio, Greenville, South Carolina, Wellington, Kansas, Jacksonville, Florida, Breda, Netherlands, Basingstoke,across the United Kingdom, and Singapore.States. The Company’s services include freight invoice rating, payment processing, auditing, and the generation of accounting and transportation information. Cass also processes and pays energyfacility-related invoices, which include electricity and gas as well as waste and telecommunications expenses, and is a provider of telecom expense management solutions. Cass solutions include integrated payments, a B2B payment platform for clients that require an agile fintech partner. Additionally, the Company offers a church management software solution and an on-line platform to provide generosity services for faith-based and non-profit organizations. The Company’s bank subsidiary, the “Bank,”Cass Commercial Bank (the “Bank”), supports the Company’s payment operations. The Bank also provides banking services to its target markets, which include privately-ownedprivately held businesses and faith-based ministries in the St. Louis metropolitan area as well as other selected cities inand restaurant franchises and faith-based ministries within the United States.
The specific payment and information processing services provided to each customer are developed individually to meet each customer’s requirements, which can vary greatly. In addition, the degree of automation such as electronic data interchange, imaging, work flow, and web-based solutions varies greatly among customers and industries. These factors combine so that pricing varies greatly among the customer base. In general, however, Cass is compensated for its information processing services through service fees, transactional level payment services, and investment of account balances generated during the payment process. The amount, type, and calculation of service fees vary greatly by service offering, but generally follow the volume of transactions processed. The Company also earns financial fees on a transaction level basis for invoice payment services when making customer payments. Financial fees include interchange revenue, foreign exchange fees and fees received through early payment of invoices. Fees are recognized at the point in time when the payment transactions are made, which is when the performance obligation is satisfied. Interest income from the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed. Both the number of transactions processed and the dollar volume processed are therefore key metrics followed by management. OtherThe Bank earns most of its revenue from net interest income.
Various factors will also influence the Company’s revenue and profitability, such as changes in the general level of interest rates, which havehas a significant effect on net interest income. The funds generated by these processing activities are invested in overnight investments, investment grade securities, advances to payees, and loans generated by the Bank. The Bank earns most of its revenue from net interest income, or the difference between the interest earned on its loans and investments and the interest paid on its deposits and other borrowings. The Bank also assesses fees on other servicesincome; industry-wide factors, such as cash management services.
Industry-wide factors that impact the Company include the willingness of large corporations to outsource key business functions, such as freight, energy, telecommunication and environmental payment and audit. The benefits that can be achieved by outsourcing transaction processing, and the management information generated by Cass’ systems can be influenced by factors such as the competitive pressures within industries to improve profitability, the general level of transportation costs, deregulation of energy costs, and consolidation of telecommunication providers. Economicproviders; and economic factors that impact the Company include the general level of economic activity, that can affect the volume and size of invoices processed, the ability to hire and retain qualified staff, and the growth and quality of the Bank’s loan portfolio. The generalFor a more detailed discussion of the Company’s revenue drivers and factors that impact the Company’s results of operation and financial condition generally, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2022 Form 10-K.
Recent Industry Developments
During the first and into the second quarter of 2023, the banking industry experienced significant volatility with high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, overall level of deposit cost, unrealized securities losses and eroding consumer confidence in the banking system. The Company's average deposits have declined $167.6 million, or 13.6%, from the second quarter of 2022 to the second quarter of 2023, primarily as a result of larger commercial depository clients moving their funds to higher interest rates also has a significant effect on the revenuerate alternatives outside of the Company. As discussed in greater detail in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in
During the Company’s 2021 Annual Report on Form 10-K,first half of 2023, the transportation industry has seen a decline in both fuel costs and overall freight rates. Primarily as a result, the general levelCompany's average accounts and drafts payable has declined $86.2 million, or 7.6%, from the second quarter of 2022 to the second quarter of 2023. Transportation dollar volumes are key to the Company’s revenue as higher volumes generally lead to an increase in payment float, which generates interest income, as well as an increase in payments in advance of funding, which generates financial fees.
Despite the decline in average deposits and average accounts and drafts payable, the Company’s liquidity position and balance sheet remains strong. The Company has experienced recent stabilization in its deposit balances as a result of an increase in deposit rates can haveand increased depositor confidence across the banking industry. Average deposits increased $7.3 million in June 2023 as compared to May 2023. Despite the decrease in average funding sources, the Company maintained average short-term investments of $185.2 million during the second quarter of 2023. In addition, all of the Company's investment securities are classified as available-for-sale and there were no outstanding borrowings at June 30, 2023.
As a negative impact onresult of rising inflation, the Federal Reserve increased the Federal Funds rate over the course of 2022 and into the first six months of 2023. The increase in the Federal Funds rate has contributed to the increase in the Company's net interest income and conversely, a rise in the general level of interest rates can have a positive impact onmargin, therefore positively impacting net interest income. The costInflation has also had the impact of fuel is another factor that has a significant impact on the transportation sector. As the price of fuel goes up or down, the Company’s earnings increase or decrease with the dollar amount of transportation invoices.
Currently, management views Cass’ major opportunityincreasing operating expenses, such as the continued expansion of its payment and information processing service offerings and customer base. Management intends to accomplish this by maintaining the Company’s leadership position in applied technology, which when combined with the security and processing controls of the Bank, makes Cass unique in the industry.compensation expense.
Critical Accounting Policies
The Company has prepared the consolidated financial statements in this report in accordance with the Financial Accounting Standards Board Accounting Standards Codification. In preparing the consolidated financial statements, management
makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting
period. These estimates have been generally accurate in the past, have been consistent and have not required any material changes. There can be no assurances that actual results will not differ from those estimates. The accounting policy that requires significant management estimates and is deemed critical to the Company’s results of operations or financial position has been discussed with the Audit and Risk Committee of the Board of Directors and is described below.
Allowance for Credit Losses. The Company performs periodic and systematic detailed reviews of its loan portfolio to determine management’s estimate of the lifetime expected credit losses. Although these estimates are based on established methodologies for determining allowance requirements, actual results can differ significantly from estimated results. These policies affect both segments of the Company. The impact and associated risks related to these policies on the Company’s business operations are discussed in the “Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments” section of this report.
Results of Operations
The following paragraphs more fully discuss the results of operations and changes in financial condition for the three-monththree month period ended SeptemberJune 30, 20222023 (“Third Quartersecond quarter of 2022”2023”) compared to the three-monththree month period ended SeptemberJune 30, 20212022 (“Third Quartersecond quarter of 2021”2022”) and the nine-monthsix month period ended SeptemberJune 30, 2022 (“Nine Months Ended 2022”2023 ("first half of 2023") compared to the nine-monthsix month period ended SeptemberJune 30, 2021 (“Nine Months Ended 2021”2022 ("first half of 2022").The. The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes and with the statistical information and financial data appearing in this report, as well as in the Company’s 2021 Annual Report on2022 Form 10-K. Results of operations for the Third Quartersecond quarter of 20222023 and first half of 2023 are not necessarily indicative of the results to be attained for any other period.
Net IncomeSummary of Results
The following table summarizes the Company’s operating results:
| (In thousands except per share data) | (In thousands except per share data) | Third Quarter of | | Nine Months Ended | (In thousands except per share data) | Second Quarter of | | First Half of |
2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change | 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change |
Processing fees | | Processing fees | $ | 19,386 | | | $ | 19,184 | | | 1.1 | % | | $ | 38,899 | | | $ | 38,220 | | | 1.8 | % |
Financial fees | | Financial fees | 11,662 | | | 10,623 | | | 9.8 | % | | 22,921 | | | 21,155 | | | 8.3 | % |
Net interest income | | Net interest income | 16,014 | | | 13,641 | | | 17.4 | % | | 32,912 | | | 25,544 | | | 28.8 | % |
(Release of) provision for credit loss | | (Release of) provision for credit loss | (120) | | | 70 | | | (271.4) | % | | (460) | | | 300 | | | (253.3) | % |
Other | | Other | 1,025 | | | 844 | | | 21.4 | % | | 2,360 | | | 1,706 | | | 38.3 | % |
Total revenues | | Total revenues | 48,207 | | | 44,222 | | | 9.0 | % | | 97,552 | | | 86,325 | | | 13.0 | % |
Operating expense | | Operating expense | 39,339 | | | 33,639 | | | 16.9 | % | | 79,711 | | | 65,467 | | | 21.8 | % |
Income before income tax expense | | Income before income tax expense | 8,868 | | | 10,583 | | | (16.2) | % | | 17,841 | | | 20,858 | | | (14.5) | % |
Income tax expense | | Income tax expense | 1,730 | | | 2,021 | | | (14.4) | % | | 3,586 | | | 4,038 | | | (11.2) | % |
Net income | Net income | $ | 8,799 | | | $ | 6,805 | | | 29.3 | % | | $ | 25,619 | | | $ | 20,902 | | | 22.6 | % | Net income | $ | 7,138 | | | $ | 8,562 | | | (16.6) | % | | $ | 14,255 | | | $ | 16,820 | | | (15.2) | % |
Diluted earnings per share | Diluted earnings per share | $ | .64 | | | $ | .48 | | | 33.3 | % | | 1.86 | | | 1.45 | | | 28.3 | % | Diluted earnings per share | $ | 0.52 | | | $ | 0.62 | | | (16.1) | % | | $ | 1.03 | | | $ | 1.22 | | | (15.6) | % |
Return on average assets | Return on average assets | 1.33 | % | | 1.14 | % | | — | | 1.32 | % | | 1.23 | % | | — | % | Return on average assets | 1.21 | % | | 1.31 | % | | — | | 1.18 | % | | 1.32 | % | | — |
Return on average equity | Return on average equity | 16.84 | % | | 10.61 | % | | — | | 15.80 | % | | 10.84 | % | | — | % | Return on average equity | 13.37 | % | | 16.53 | % | | — | | 13.56 | % | | 15.30 | % | | — |
Key profitability metrics were upSecond quarter of 2023 compared to second quarter of 2022:
The Company recorded revenue of $48.2 million during the three and nine months ended SeptemberJune 30, 2023, up 9.0% from the three months ended June 30, 2022, primarily driven by significant revenue growth in financial fees andrising interest rates which positively impacted net interest income. Partially offsetting the revenue growth wasincome and financial fees. Operating expense increased 16.9% primarily driven by an increase in operatingfull-time equivalent employees and
other expenses as more fully described below.related to strategic investments in technology initiatives. Net income was $7.1 million and diluted EPS was $0.52 per share, decreases of 16.6% and 16.1% from the three months ended June 30, 2022, respectively.
The Company posted a 1.21% return on average assets and 13.37% return on average equity.
First half of 2023 compared to first half of 2022:
The Company recorded revenue of $97.6 million during the first half of 2023, up 13.0% from the first half of 2022. Operating expense increased 21.8%. Net income was $14.3 million and diluted EPS was $1.03 per share, decreases of 15.2% and 15.6% from the six months ended June 30, 2022, respectively.
The Company posted a 1.18% return on average assets and 13.56% return on average equity.
Fee Revenue and Other Income
The Company’s fee revenue is derived mainly from transportation and facility processing and financial fees. As the Company provides its processing and payment services, it is compensated by service fees which are typically calculated on a per-item basis, discounts received for services provided to carriers and by the accounts and drafts payable balances generated in the payment process which can be used to
generate interest income. In addition, the Company's fee revenue consists of financial fees which are generated through the payment process. Processing volumes, average payments in advance of funding, and fee revenue were as follows:
| (In thousands) | (In thousands) | Third Quarter of | | Nine Months Ended | (In thousands) | Second Quarter of | | First Half of |
2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change | 2023 | | 2022 | | | % Change | | 2023 | | 2022 | | | % Change |
Transportation invoice volume | Transportation invoice volume | 9,385 | | | 9,333 | | | 0.6 | % | | 27,633 | | | 27,581 | | | 0.2 | % | Transportation invoice volume | 9,193 | | | 9,289 | | | | (1.0) | % | | 18,291 | | | 18,247 | | | | 0.2 | % |
Transportation invoice dollar volume | Transportation invoice dollar volume | $ | 11,549,980 | | | $ | 9,540,408 | | | 21.1 | % | | $ | 33,818,573 | | | $ | 26,385,936 | | | 28.2 | % | Transportation invoice dollar volume | $ | 9,711,801 | | | $ | 11,413,414 | | | | (14.9) | % | | $ | 19,980,252 | | | $ | 22,268,594 | | | | (10.3) | % |
Facility-related transaction volume 1 | 3,315 | | | 3,104 | | | 6.8 | % | | 9,794 | | | 9,351 | | | 4.7 | % | |
Facility-related transaction volume 1 2 | | Facility-related transaction volume 1 2 | 3,467 | | | 3,186 | | | | 8.8 | % | | 6,935 | | | 6,479 | | | | 7.0 | % |
Facility-related dollar volume 2 | Facility-related dollar volume 2 | $ | 5,485,783 | | | $ | 4,215,044 | | | 30.1 | % | | $ | 14,699,903 | | | $ | 11,590,437 | | | 26.8 | % | Facility-related dollar volume 2 | $ | 4,578,490 | | | $ | 4,570,178 | | | | 0.2 | % | | $ | 9,891,875 | | | $ | 9,214,120 | | | | 7.4 | % |
Average payments in advance of funding | Average payments in advance of funding | $ | 277,683 | | | $ | 213,922 | | | 29.8 | % | | $ | 283,431 | | | $ | 196,492 | | | 44.2 | % | Average payments in advance of funding | $ | 254,869 | | | $ | 293,150 | | | | (13.1) | % | | $ | 247,918 | | | $ | 286,352 | | | | (13.4) | % |
Processing fees | Processing fees | $ | 18,964 | | | $ | 18,461 | | | 2.7 | % | | $ | 57,184 | | | $ | 55,882 | | | 2.3 | % | Processing fees | $ | 19,386 | | | $ | 19,184 | | | | 1.1 | % | | $ | 38,899 | | | $ | 38,220 | | | | 1.8 | % |
Financial fees | Financial fees | $ | 11,252 | | | $ | 8,624 | | | 30.5 | % | | $ | 32,406 | | | $ | 23,122 | | | 40.2 | % | Financial fees | $ | 11,662 | | | $ | 10,623 | | | | 9.8 | % | | $ | 22,921 | | | $ | 21,155 | | | | 8.3 | % |
Other fees | | Other fees | $ | 1,025 | | | $ | 844 | | | | 21.4 | % | | $ | 2,360 | | | $ | 1,706 | | | | 38.3 | % |
1.Facility expense transaction volumes have been restated for the current and prior periodsperiod to reflect total invoices processed. In prior periods,Previously, billing account numbers were utilized for the telecom division as a proxy for transactions.
2.Includes energy, telecom and environmental.
Third QuarterSecond quarter of 20222023 compared to Third Quartersecond quarter of 2021:2022:
ProcessingFinancial fee revenue increased $503,000,$1.0 million, or 2.7%9.8%, primarily attributable to the increase in short-term interest rates, partially offset by a decline in transportation anddollar volumes of 14.9%.
Processing fee revenue increased $202,000, or 1.1%, primarily attributable to the increase in facility-related transaction volumes of 0.6% and 6.8%, respectively.8.8%.
First half of 2023 compared to first half of 2022:
Financial fee revenue increased $2,628,000,$1.8 million, or 30.5%8.3%, primarily attributable to the 21.1% and 30.1% increasesincrease in short-term interest rates, partially offset by a decline in transportation and facility-related dollar volumes respectively. The increase in dollar volumes contributed to a 29.8% increase in average payments in advance of funding, which is a significant driver of financial fee revenue. The significant increase in transportation invoice dollar volume was driven by inflationary pressures, supply chain disruptions and fuel surcharges, among other factors. Facility-related invoices increased 6.8%, while dollar volume increased 30.1%10.3%. The increase in facility-related dollar volume was largely due to an increase in energy prices.
Nine Months Ended September 30, 2022 compared to Nine Months Ended September 30, 2021:
Processing fee revenue increased $1,302,000,$679,000, or 2.3%1.8%, primarily attributable to the increase in transportation and facility-related transaction volumes of 0.2% and 4.7%7.0%, respectively.
Financial fee revenue increased $9,284,000, or 40.2%, primarily attributable to the 28.2% and 26.8% increases in transportation and facility-related dollar volumes, respectively. The increase in dollar volumes contributed to a 44.2% increase in average payments in advance of funding.
Net Interest Income
Net interest income is the difference between interest earned on loans, investments, and other earning assets and interest expense on deposits and other interest-bearing liabilities. Net interest income is a significant source of the Company’s revenues. The following table summarizes the changes in tax-equivalent net interest income and related factors:
| (In thousands) | (In thousands) | Third Quarter of | | Nine Months Ended | (In thousands) | Second Quarter of | | First Half of |
2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change | 2023 | | 2022 | | | % Change | | 2023 | | 2022 | | | % Change |
Average earnings assets | Average earnings assets | $ | 2,243,219 | | | $ | 2,036,296 | | | 10.2 | % | | $ | 2,196,704 | | | $ | 1,965,976 | | | 11.7 | % | Average earnings assets | $ | 2,010,771 | | | $ | 2,222,653 | | | | (9.5) | % | | $ | 2,086,332 | | | $ | 2,173,060 | | | | (4.0) | % |
Average interest-bearing liabilities | Average interest-bearing liabilities | 597,469 | | | 600,263 | | | (0.5) | % | | 598,812 | | | 583,478 | | | 2.6 | % | Average interest-bearing liabilities | 512,519 | | | 605,861 | | | | (15.4) | % | | 554,494 | | | 599,494 | | | | (7.5) | % |
Net interest income* | Net interest income* | 16,383 | | | 11,900 | | | 37.7 | % | | 42,809 | | | 34,005 | | | 25.9 | % | Net interest income* | 16,277 | | | 14,077 | | | | 15.6 | % | | 33,496 | | | 26,426 | | | | 26.8 | % |
Net interest margin* | Net interest margin* | 2.90 | % | | 2.32 | % | | 2.61 | % | | 2.31 | % | | Net interest margin* | 3.25 | % | | 2.54 | % | | | | 3.24 | % | | 2.45 | % | | | |
Yield on earning assets* | Yield on earning assets* | 3.04 | % | | 2.37 | % | | 2.69 | % | | 2.37 | % | | Yield on earning assets* | 3.98 | % | | 2.60 | % | | | | 3.91 | % | | 2.50 | % | | | |
Rate on interest-bearing liabilities | 0.52 | % | | 0.19 | % | | 0.30 | % | | 0.21 | % | | |
Cost of interest-bearing liabilities | | Cost of interest-bearing liabilities | 2.89 | % | | 0.22 | % | | | | 2.52 | % | | 0.19 | % | | | |
*Presented on a tax-equivalent basis assuming a tax rate of 21% for both 20222023 and 2021.2022.
Third QuarterSecond quarter of 20222023 compared to Third Quartersecond quarter of 2021:2022:
Average earning assets increased $206,923,000, or 10.2%. The overall increase in average interest-earning asset balances wasnet interest income is primarily due to increasesan increase in average investmentsthe Federal Funds rate throughout 2022 and loans,into the first half of 2023, positively affecting the net interest margin which increased to 3.25% as compared to 2.54% in the prior year. This was partially offset by athe decrease of average earning assets by $211.9 million, or 9.5%. The yield on interest-earning assets increased 138 basis points from 2.60% to 3.98% while the cost of interest-bearing liabilities increased 267 basis points from 0.22% to 2.89%.
Average loans increased $102.0 million, or 10.5%, to $1.1 billion. This increase was due to loan growth during the second half of 2022, specifically in the Company's franchise restaurants, faith-based, and lease financing receivables portfolios. The average yield on loans increased 107 basis points to 4.82% primarily due to the increase in short-term investments.interest rates.
Average investment securities increased $309,866,000,decreased $48.2 million, or 59.9%6.0%, as cash provided by increases in funding sources was utilizeddue to purchasethe sale and maturity of investment securities.securities throughout the first half of 2023. The average yield on taxable investment securities increased 7385 basis points to 2.11%2.63% as a result of the increase in short and long-term interest rates. The average yield on tax-exempt investment securities declined two25 basis points to 2.85%2.68%. These securities are longer term fixed rate and do not reprice as quickly in a rising interest rate environment. Thethe Company has not purchased tax-exempt investmentany such securities during the first nine months of 2022.since interest rates began increasing.
Average short-term investments, consisting of interest-bearing deposits in other financial institutions and federal funds sold, decreased $265.7 million, or 58.9%. The decrease is primarily a result of the increase in the average balances of loans, increased $111,034,000 as organic growth in franchise, faith-based and other commercial and industrial loans more than offset a $36,254,000 reductioncoupled with the decrease in average PPP loans. The average yield on loans declined 5 basis points to 4.03% primarily due to a $812,000 decrease in PPP loan fees,funding sources, partially offset by the increasea decrease in short-term interest rates that began in March 2022 and continued through September 2022. Excluding the impact of the PPP loan fees, the average yield on loans increased 32 basis points.
The average balance of short-term investments decreased $213,977,000, or 33.1%, as available funds were deployed into investment securities and loans.securities. The average yield on short-term investments increased 192370 basis points to 2.07%4.55% primarily due to the increase in short-term interest rates that began in March 2022. The vast majority of these short-term investments are held at the Federal Reserve Bank.
The average balance of interest-bearing deposits decreased $2,795,000,$96.5 million, or 0.5% due15.9%. Average demand deposits decreased $71.2 million, or 11.4%. The Company has experienced deposit attrition as larger commercial depository clients moved their funds to a decrease in average time deposits.higher interest rate alternatives outside the Company. The average rate paid on interest-bearing deposits increased 33266 basis points to 0.52%2.88% due to the increase in short-term interest rates.
Average demand deposits increased $133,756,000, or 29.5%. The increase was driven by significant liquidity in the economy resulting in higher deposit balances.
Average accounts and drafts payable increased $171,732,000,decreased $86.2 million, or 17.0%7.6%. The increasedecrease in average accounts and drafts payable was primarily driven by inflationary pressures, fuel surcharges, and increased energy prices, which continuethe decrease in transportation dollar volumes of 14.9%.
First half of 2023 compared to drive prices higher.first half of 2022:
Tax-equivalent netNet interest income increased $4,483,000, or 37.7%, compared to the same period in the prior year driven by the 10.2%first half of 2023 increased primarily due to an increase in average interest-earning assetsthe Federal Funds rate throughout 2022 and 58 basis point increase ininto the first half of 2023, positively affecting the net interest margin from 2.32%which increased to 2.90%. The increase3.24% as compared to 2.45% in the net interest marginprior year. This was drivenpartially offset by the increase in short-term interest rates which positively impacts the Company's net interest margin over time asdecrease of average interest-earningearning assets of $2,243,219,000 greatly exceed average interest-bearing liabilities of $597,469,000.by $86.7 million, or 4.0%. The
Nine Months Ended September 30, 2022 comparedyield on interest-earning assets increased 141 basis points from 2.50% to Nine Months Ended September 30, 2021:3.91% while the cost of interest-bearing liabilities increased 233 basis points from 0.19% to 2.52%.
Average earning assetsloans increased $230,728,000,$109.2 million, or 11.7%.11.3%, to $1.1 billion. This increase was due to loan growth during 2022, specifically in the Company's franchise restaurants, faith-based, and lease financing receivables portfolios. The overall increase in average interest-earning asset balances wasyield on loans increased 99 basis points to 4.72% primarily due to increasesthe increase in average investments and loans, partially offset by a decrease in average short-term investments.interest rates.
Average investment securities increased $318,143,000,$26.0 million, or 70.0%.3.5%, as cash provided by increases in funding sources was utilized to purchase investment securities during 2022. The average yield on taxable investment securities increased 5993 basis points to 1.83%2.59% as a result of the increase in short and long-term interest rates. The average yield on tax-exempt investment securities declined six17 basis points to 2.90%2.75%.
Average loans increased $87,424,000, or 9.9%. The average yield on loans declined 14 basis points to 3.83% primarily due to a $2,155,000 decrease in PPP loan fees, partially offset by the increase in short-term interest rates that began in March 2022. Excluding the impact of the PPP loan fees, the average yield on loans increased 19 basis points.
Average short-term investments decreased $174,839,000,$221.9 million, or 27.9%, as available funds were deployed into investment securities and loans.48.0%. The decrease is primarily a result of the increase in the average balance of loans, coupled with the decrease in average funding sources. The average yield on short-term investments increased 90387 basis points to 1.01%4.38% primarily due to the increase in short-term interest rates that began in March 2022.rates.
The average balance of interest-bearing deposits increased $15,334,000,decreased $49.5 million, or 2.6% due8.3%. Average demand deposits decreased $45.9 million, or 7.7%. The Company has experienced deposit attrition as larger commercial depository clients moved their funds to an increase in interest-bearing demand deposits.higher interest rate alternatives outside the Company. The average rate paid on interest-bearing deposits increased 9231 basis points to 0.30%2.50% due to the increase in short-term interest rates.
Average demand deposits increased $164,488,000, or 38.2%. The increase was driven by significant liquidity in the economy resulting in higher deposit balances.
Average accounts and drafts payable increased $182,926,000,decreased $39.8 million, or 19.2%3.6%. The increasedecrease in average accounts and drafts payable was primarily driven by inflationary pressures, fuel surcharges, and increased energy prices, which continue to drive prices higher.
Tax-equivalent net interest income increased $8,804,000, or 25.9%the decrease in transportation expense dollar volumes of 10.3%, compared to the same period in the prior year driven by the 11.7% increase in average interest-earning assets and 30 basis point increase in the net interest margin from 2.31% to 2.61%. The increase in the net interest margin was drivenpartially offset by the increase in short-term interest rates which positively impacts the Company's net interest margin over time as average interest-earning assetsfacility-related dollar volumes of $2,196,704,000 greatly exceed average interest-bearing liabilities of $598,812,000.
For more information on the changes in net interest income, please refer to the tables that follow.7.4%.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rate and Interest Differential
The following tables show the condensed average balance sheets for each of the periods reported, the tax-equivalent interest income and expense for each category of interest-earning assets and interest-bearing liabilities, and the average yield on such categories of interest-earning assets and the average rates paid on such categories of interest-bearing liabilities for each of the periods reported.
| (In thousands) | (In thousands) | Third Quarter of 2022 | | Third Quarter of 2021 | (In thousands) | Second Quarter of 2023 | | Second Quarter of 2022 | |
Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | |
Assets1 | Assets1 | | Assets1 | | |
Interest-earning assets | Interest-earning assets | | Interest-earning assets | | |
Loans2: | Loans2: | | Loans2: | $ | 1,075,891 | | | $ | 12,931 | | | 4.82 | % | | $ | 973,871 | | | $ | 9,107 | | | 3.75 | % | |
Taxable | $ | 984,104 | | | $ | 10,005 | | | 4.03 | % | | $ | 873,070 | | | $ | 8,987 | | | 4.08 | % | |
Investment securities3: | Investment securities3: | | Investment securities3: | | |
Taxable | Taxable | 554,315 | | | 2,948 | | | 2.11 | % | | 209,662 | | | 731 | | | 1.38 | % | Taxable | 561,989 | | | 3,687 | | | 2.63 | % | | 513,474 | | | 2,275 | | | 1.78 | % | |
Tax-exempt4 | Tax-exempt4 | 273,284 | | | 1,963 | | | 2.85 | % | | 308,071 | | | 2,228 | | | 2.87 | % | Tax-exempt4 | 187,661 | | | 1,253 | | | 2.68 | % | | 284,366 | | | 2,075 | | | 2.93 | % | |
| Short-term investments | Short-term investments | 431,516 | | | 2,249 | | | 2.07 | % | | 645,493 | | | 241 | | | 0.15 | % | Short-term investments | 185,230 | | | 2,100 | | | 4.55 | % | | 450,942 | | | 959 | | | 0.85 | % | |
Total interest-earning assets | Total interest-earning assets | 2,243,219 | | | 17,165 | | | 3.04 | % | | 2,036,296 | | | 12,187 | | | 2.37 | % | Total interest-earning assets | 2,010,771 | | | 19,971 | | | 3.98 | % | | 2,222,653 | | | 14,416 | | | 2.60 | % | |
Non-interest-earning assets | Non-interest-earning assets | | | Non-interest-earning assets | | | |
Cash and due from banks | Cash and due from banks | 19,084 | | | 18,778 | | | Cash and due from banks | 24,461 | | | 19,088 | | | |
Premises and equipment, net | Premises and equipment, net | 19,515 | | | 17,718 | | | Premises and equipment, net | 22,932 | | | 19,345 | | | |
Bank-owned life insurance | Bank-owned life insurance | 47,546 | | | 28,134 | | | Bank-owned life insurance | 48,391 | | | 47,267 | | | |
Goodwill and other intangibles | Goodwill and other intangibles | 21,745 | | | 17,167 | | | Goodwill and other intangibles | 21,159 | | | 18,089 | | | |
Payments in advance of funding | Payments in advance of funding | 277,682 | | | 213,922 | | | Payments in advance of funding | 254,869 | | | 293,150 | | | |
Unrealized loss on investment securities | | Unrealized loss on investment securities | (62,873) | | | (42,038) | | | |
Other assets | Other assets | 1,602 | | | 52,412 | | | Other assets | 63,902 | | | 51,083 | | | |
Allowance for credit losses | Allowance for credit losses | (12,579) | | | (11,183) | | | Allowance for credit losses | (13,253) | | | (12,417) | | | |
Total assets | Total assets | $ | 2,617,814 | | | $ | 2,373,244 | | | Total assets | $ | 2,370,359 | | | $ | 2,616,220 | | | |
Liabilities and Shareholders’ Equity1 | Liabilities and Shareholders’ Equity1 | | Liabilities and Shareholders’ Equity1 | | |
Interest-bearing liabilities | Interest-bearing liabilities | | | Interest-bearing liabilities | | | |
Interest-bearing demand deposits | Interest-bearing demand deposits | $ | 545,539 | | | $ | 701 | | | 0.51 | % | | $ | 531,541 | | | $ | 145 | | | 0.11 | % | Interest-bearing demand deposits | $ | 442,686 | | | $ | 3,229 | | | 2.93 | % | | $ | 550,938 | | | $ | 266 | | | 0.19 | % | |
Savings deposits | Savings deposits | 13,547 | | | 12 | | | 0.35 | % | | 17,767 | | | 2 | | | 0.04 | % | Savings deposits | 6,457 | | | 26 | | | 1.62 | % | | 12,894 | | | 3 | | | 0.09 | % | |
Time deposits >= $100 | Time deposits >= $100 | 16,325 | | | 37 | | | 0.90 | % | | 19,403 | | | 49 | | | 1.00 | % | Time deposits >= $100 | 21,934 | | | 151 | | | 2.76 | % | | 16,926 | | | 36 | | | 0.85 | % | |
Other time deposits | Other time deposits | 22,047 | | | 32 | | | 0.58 | % | | 31,542 | | | 91 | | | 1.14 | % | Other time deposits | 38,243 | | | 245 | | | 2.57 | % | | 25,082 | | | 34 | | | 0.54 | % | |
Total interest-bearing deposits | Total interest-bearing deposits | 597,458 | | | 782 | | | 0.52 | % | | 600,253 | | | 287 | | | 0.19 | % | Total interest-bearing deposits | 509,320 | | | 3,651 | | | 2.88 | % | | 605,840 | | | 339 | | | 0.22 | % | |
Short-term borrowings | Short-term borrowings | 11 | | | — | | | — | % | | 10 | | | — | | | — | % | Short-term borrowings | 3,199 | | | 43 | | | 5.39 | % | | 21 | | | — | | | — | % | |
Total interest-bearing liabilities | Total interest-bearing liabilities | 597,469 | | | 782 | | | 0.52 | % | | 600,263 | | | 287 | | | 0.19 | % | Total interest-bearing liabilities | 512,519 | | | 3,694 | | | 2.89 | % | | 605,861 | | | 339 | | | 0.22 | % | |
Non-interest bearing liabilities | Non-interest bearing liabilities | | Non-interest bearing liabilities | | |
Demand deposits | Demand deposits | 586,872 | | | 453,116 | | | Demand deposits | 552,718 | | | 623,904 | | | |
Accounts and drafts payable | Accounts and drafts payable | 1,182,373 | | | 1,010,641 | | | Accounts and drafts payable | 1,049,281 | | | 1,135,504 | | | |
Other liabilities | Other liabilities | 43,852 | | | 54,703 | | | Other liabilities | 41,775 | | | 43,123 | | | |
Total liabilities | Total liabilities | 2,410,566 | | | 2,118,723 | | | Total liabilities | 2,156,293 | | | 2,408,392 | | | |
Shareholders’ equity | Shareholders’ equity | 207,248 | | | 254,521 | | | Shareholders’ equity | 214,066 | | | 207,828 | | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 2,617,814 | | | $ | 2,373,244 | | | Total liabilities and shareholders’ equity | $ | 2,370,359 | | | $ | 2,616,220 | | | |
Net interest income | Net interest income | | $ | 16,383 | | | $ | 11,900 | | | | Net interest income | | $ | 16,277 | | | $ | 14,077 | | | | |
Net interest margin | Net interest margin | | 2.90 | % | | 2.32 | % | Net interest margin | | 3.25 | % | | 2.54 | % | |
Interest spread | Interest spread | | 2.52 | % | | 2.18 | % | Interest spread | | 1.09 | % | | 2.38 | % | |
1.Balances shown are daily averages.
2.Interest income on loans includes net loan fees of $99,000$291,000 and $969,000$176,000 for the thirdsecond quarter of 2023 and 2022, and 2021, respectively. The decrease in net loan fees is due to higher PPP fees in 2021.
3.For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.
4.Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for both 20222023 and 2021.2022. The tax-equivalent adjustment was approximately $412,000$263,000 and $468,000$436,000 for the thirdsecond quarter of 20222023 and 2021,2022, respectively.
| (In thousands) | (In thousands) | Nine Months Ended 2022 | | Nine Months Ended 2021 | (In thousands) | First Half of 2023 | | First Half of 2022 | |
Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | |
Assets1 | Assets1 | | Assets1 | | |
Interest-earning assets | Interest-earning assets | | Interest-earning assets | | |
Loans2: | Loans2: | | Loans2: | | |
Taxable | Taxable | $ | 972,698 | | | $ | 27,890 | | | 3.83 | % | | $ | 885,274 | | | $ | 26,270 | | | 3.97 | % | Taxable | $ | 1,076,055 | | | $ | 25,166 | | | 4.72 | % | | $ | 966,900 | | | $ | 17,884 | | | 3.73 | % | |
Investment securities3: | Investment securities3: | | Investment securities3: | | |
Taxable | Taxable | 488,257 | | | 6,679 | | | 1.83 | % | | 149,953 | | | 1,387 | | | 1.24 | % | Taxable | 566,804 | | | 7,274 | | | 2.59 | % | | 454,681 | | | 3,732 | | | 1.66 | % | |
Tax-exempt4 | Tax-exempt4 | 284,187 | | | 6,161 | | | 2.90 | % | | 304,348 | | | 6,748 | | | 2.96 | % | Tax-exempt4 | 203,587 | | | 2,781 | | | 2.75 | % | | 289,729 | | | 4,198 | | | 2.92 | % | |
| Short-term investments | Short-term investments | 451,562 | | | 3,423 | | | 1.01 | % | | 626,401 | | | 515 | | | 0.11 | % | Short-term investments | 239,886 | | | 5,213 | | | 4.38 | % | | 461,750 | | | 1,174 | | | 0.51 | % | |
Total interest-earning assets | Total interest-earning assets | 2,196,704 | | | 44,153 | | | 2.69 | % | | 1,965,976 | | | 34,920 | | | 2.37 | % | Total interest-earning assets | 2,086,332 | | | 40,434 | | | 3.91 | % | | 2,173,060 | | | 26,988 | | | 2.50 | % | |
Non-interest-earning assets: | Non-interest-earning assets: | | Non-interest-earning assets: | | |
Cash and due from banks | Cash and due from banks | 20,304 | | | 19,890 | | | Cash and due from banks | 23,260 | | | 20,924 | | | |
Premises and equipment, net | Premises and equipment, net | 19,192 | | | 17,877 | | | Premises and equipment, net | 21,689 | | | 19,027 | | | |
Bank-owned life insurance | Bank-owned life insurance | 46,009 | | | 21,286 | | | Bank-owned life insurance | 48,252 | | | 45,228 | | | |
Goodwill and other intangibles | Goodwill and other intangibles | 18,887 | | | 17,381 | | | Goodwill and other intangibles | 21,257 | | | 17,434 | | | |
Payments in advance of funding | Payments in advance of funding | 283,430 | | | 196,492 | | | Payments in advance of funding | 247,918 | | | 286,352 | | | |
Unrealized loss on investment securities | | Unrealized loss on investment securities | (64,689) | | | (21,805) | | | |
Other assets | Other assets | 15,583 | | | 52,142 | | | Other assets | 63,869 | | | 44,497 | | | |
Allowance for credit losses | Allowance for credit losses | (12,349) | | | (11,615) | | | Allowance for credit losses | (13,394) | | | (12,232) | | | |
Total assets | Total assets | $ | 2,587,760 | | | $ | 2,279,429 | | | Total assets | $ | 2,434,494 | | | $ | 2,572,485 | | | |
Liabilities and Shareholders’ Equity1 | Liabilities and Shareholders’ Equity1 | | Liabilities and Shareholders’ Equity1 | | |
Interest-bearing liabilities: | Interest-bearing liabilities: | | Interest-bearing liabilities: | | |
Interest-bearing demand deposits | Interest-bearing demand deposits | $ | 542,378 | | | $ | 1,102 | | | 0.27 | % | | $ | 510,886 | | | $ | 431 | | | 0.11 | % | Interest-bearing demand deposits | $ | 482,825 | | | $ | 6,053 | | | 2.53 | % | | $ | 540,771 | | | $ | 402 | | | 0.15 | % | |
Savings deposits | Savings deposits | 14,628 | | | 17 | | | 0.16 | % | | 19,098 | | | 7 | | | 0.05 | % | Savings deposits | 6,778 | | | 48 | | | 1.43 | % | | 15,178 | | | 5 | | | 0.07 | % | |
Time deposits >= $100 | Time deposits >= $100 | 17,054 | | | 115 | | | 0.90 | % | | 22,231 | | | 200 | | | 1.20 | % | Time deposits >= $100 | 22,863 | | | 260 | | | 2.29 | % | | 17,424 | | | 78 | | | 0.90 | % | |
Other time deposits | Other time deposits | 24,741 | | | 110 | | | 0.59 | % | | 31,253 | | | 277 | | | 1.18 | % | Other time deposits | 37,519 | | | 461 | | | 2.48 | % | | 26,111 | | | 77 | | | 0.59 | % | |
Total interest-bearing deposits | Total interest-bearing deposits | 598,801 | | | 1,344 | | | 0.30 | % | | 583,468 | | | 915 | | | 0.21 | % | Total interest-bearing deposits | 549,985 | | | 6,822 | | | 2.50 | % | | 599,484 | | | 562 | | | 0.19 | % | |
Short-term borrowings | Short-term borrowings | 11 | | | — | | | — | % | | 10 | | | — | | | — | % | Short-term borrowings | 4,509 | | | 116 | | | 5.19 | % | | 10 | | | — | | | — | % | |
Total interest-bearing liabilities | Total interest-bearing liabilities | 598,812 | | | 1,344 | | | 0.30 | % | | 583,478 | | | 915 | | | 0.21 | % | Total interest-bearing liabilities | 554,494 | | | 6,938 | | | 2.52 | % | | 599,494 | | | 562 | | | 0.19 | % | |
Non-interest bearing liabilities: | Non-interest bearing liabilities: | | Non-interest bearing liabilities: | | |
Demand deposits | Demand deposits | 594,994 | | | 430,506 | | | Demand deposits | 553,178 | | | 599,122 | | | |
Accounts and drafts payable | Accounts and drafts payable | 1,135,673 | | | 952,747 | | | Accounts and drafts payable | 1,072,105 | | | 1,111,935 | | | |
Other liabilities | Other liabilities | 41,454 | | | 54,935 | | | Other liabilities | 42,777 | | | 40,237 | | | |
Total liabilities | Total liabilities | 2,370,933 | | | 2,021,666 | | | Total liabilities | 2,222,554 | | | 2,350,788 | | | |
Shareholders’ equity | Shareholders’ equity | 216,827 | | | 257,763 | | | Shareholders’ equity | 211,940 | | | 221,697 | | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 2,587,760 | | | $ | 2,279,429 | | | Total liabilities and shareholders’ equity | $ | 2,434,494 | | | $ | 2,572,485 | | | |
Net interest income | Net interest income | | $ | 42,809 | | | $ | 34,005 | | | Net interest income | | $ | 33,496 | | | $ | 26,426 | | | |
Net interest margin | Net interest margin | | 2.61 | % | | 2.31 | % | Net interest margin | | 3.24 | % | | 2.45 | % | |
Interest spread | Interest spread | | 2.39 | % | | 2.17 | % | Interest spread | | 1.39 | % | | 2.31 | % | |
1.Balances shown are daily averages.
2.Interest income on loans includes net loan fees of $500,000$511,000 and $2,738,000$401,000 for the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively. The decrease in net loan fees is due to higher PPP fees in 2021.
3.For purposes of these computations, yields on investment securities are computed as interest income divided by the average amortized cost of the investments.
4.Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for both the ninesix months ended SeptemberJune 30, 20222023 and 2021.2022. The tax-equivalent adjustment was approximately $1,294,000$584,000 and $1,417,000$882,000 for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively.
Analysis of Net Interest Income Changes
The following tables present the changes in interest income and expense between periods due to changes in volume and interest rates. That portion of the change in interest attributable to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the change in each.
| (In thousands) | (In thousands) | Third Quarter of 2022 Compared to Third Quarter of 2021 | (In thousands) | Second Quarter of 2023 Compared to Second Quarter of 2022 |
Volume | | Rate | | Total | Volume | | Rate | | Total |
Increase (decrease) in interest income: | Increase (decrease) in interest income: | | Increase (decrease) in interest income: | |
Loans1: | Loans1: | | Loans1: | $ | 1,027 | | | $ | 2,797 | | | $ | 3,824 | |
Taxable | $ | 1,130 | | | $ | (112) | | | $ | 1,018 | | |
Investment securities: | Investment securities: | | Investment securities: | |
Taxable | Taxable | 1,680 | | | 537 | | | 2,217 | | Taxable | 233 | | | 1,179 | | | 1,412 | |
Tax-exempt2 | Tax-exempt2 | (250) | | | (15) | | | (265) | | Tax-exempt2 | (657) | | | (165) | | | (822) | |
| Short-term investments | Short-term investments | (106) | | | 2,114 | | | 2,008 | | Short-term investments | (856) | | | 1,997 | | | 1,141 | |
Total interest income | Total interest income | 2,454 | | | 2,524 | | | 4,978 | | Total interest income | (253) | | | 5,808 | | | 5,555 | |
Interest expense on: | Interest expense on: | | Interest expense on: | |
Interest-bearing demand deposits | Interest-bearing demand deposits | 4 | | | 552 | | | 556 | | Interest-bearing demand deposits | (61) | | | 3,024 | | | 2,963 | |
Savings deposits | Savings deposits | (1) | | | 11 | | | 10 | | Savings deposits | (2) | | | 25 | | | 23 | |
Time deposits >=$100 | Time deposits >=$100 | (7) | | | (5) | | | (12) | | Time deposits >=$100 | 13 | | | 102 | | | 115 | |
Other time deposits | Other time deposits | (22) | | | (37) | | | (59) | | Other time deposits | 26 | | | 185 | | | 211 | |
Short-term borrowings | | Short-term borrowings | — | | | 43 | | | 43 | |
Total interest expense | Total interest expense | (26) | | | 521 | | | 495 | | Total interest expense | (24) | | | 3,379 | | | 3,355 | |
Net interest income | Net interest income | $ | 2,480 | | | $ | 2,003 | | | $ | 4,483 | | Net interest income | $ | (229) | | | $ | 2,429 | | | $ | 2,200 | |
1.Interest income includes net loan fees.
2.Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for the three months ended SeptemberJune 30, 20222023 and 2021.
2022.
| (In thousands) | (In thousands) | Nine Months Ended 2022 Compared to Nine Months Ended of 2021 | (In thousands) | First Half of 2023 Compared to First Half of 2022 |
Volume | | Rate | | Total | Volume | | Rate | | Total |
Increase (decrease) in interest income: | Increase (decrease) in interest income: | | Increase (decrease) in interest income: | |
Loans1: | Loans1: | | Loans1: | |
Taxable | Taxable | $ | 2,529 | | | $ | (909) | | | $ | 1,620 | | Taxable | $ | 2,173 | | | $ | 5,109 | | | $ | 7,282 | |
Investment securities: | Investment securities: | | | | Investment securities: | | | |
Taxable | Taxable | 4,365 | | | 927 | | | 5,292 | | Taxable | 1,083 | | | 2,459 | | | 3,542 | |
Tax-exempt2 | Tax-exempt2 | (440) | | | (147) | | | (587) | | Tax-exempt2 | (1,185) | | | (232) | | | (1,417) | |
| Short-term investments | Short-term investments | (183) | | | 3,091 | | | 2,908 | | Short-term investments | (815) | | | 4,854 | | | 4,039 | |
Total interest income | Total interest income | 6,271 | | | 2,962 | | | 9,233 | | Total interest income | 1,256 | | | 12,190 | | | 13,446 | |
Interest expense on: | Interest expense on: | | | | | | Interest expense on: | | | | | |
Interest-bearing demand deposits | Interest-bearing demand deposits | 28 | | | 643 | | | 671 | | Interest-bearing demand deposits | (48) | | | 5,699 | | | 5,651 | |
Savings deposits | Savings deposits | (2) | | | 12 | | | 10 | | Savings deposits | (4) | | | 47 | | | 43 | |
Time deposits >=$100 | Time deposits >=$100 | (41) | | | (44) | | | (85) | | Time deposits >=$100 | 31 | | | 151 | | | 182 | |
Other time deposits | Other time deposits | (49) | | | (118) | | | (167) | | Other time deposits | 46 | | | 338 | | | 384 | |
| Short-term borrowings | | Short-term borrowings | — | | | 116 | | | 116 | |
Total interest expense | Total interest expense | (64) | | | 493 | | | 429 | | Total interest expense | 25 | | | 6,351 | | | 6,376 | |
Net interest income | Net interest income | $ | 6,335 | | | $ | 2,469 | | | $ | 8,804 | | Net interest income | $ | 1,231 | | | $ | 5,839 | | | $ | 7,070 | |
1.Interest income includes net loan fees.
2.Interest income is presented on a tax-equivalent basis assuming a tax rate of 21% for the threesix months ended SeptemberJune 30, 20222023 and 2021.2022.
Provision and Allowance for Credit Losses and Allowance for Unfunded Commitments
The Company recorded a provision forrelease of credit losses and off-balance sheet credit exposures of $550,000,$120,000 and $340,000a provision for credit losses of $70,000 in the Third Quartersecond quarter of 20222023 and 2021,2022, respectively. The Company recorded a provision forrelease of credit losses and off-balance sheet credit exposures of $850,000,$460,000 and release ofa provision for credit losses of $870,000$300,000 in the Nine Months Endedfirst half of 2023 and 2022, and 2021, respectively. The amount of the (release of) provision for (release of) credit losses is derived from the Company’s quarterly Current Expected Credit Loss (“CECL”) model. The amount of the (release of) provision for (release of) credit losses will fluctuate as determined by these quarterly analyses. The provision forrelease of credit losses in the Third Quartersecond quarter of 20222023 and the Nine Months Ended 2022first half of 2023 was primarily driven by the decrease in loan growth and external economic factors, including the reduction in the forecast of Gross Domestic Product.balances outstanding from December 31, 2022.
The Company experienced no net loan recoveriescharge-offs in the Third Quartersecond quarter of 20222023 and $11,000 in the Third Quarter of 2021. There were $12,000 net loan recoveries in the Nine Months Ended 2022 and $28,000 in the Nine Months Ended 2021.2022. The ACL was $13,049,000$13.2 million at SeptemberJune 30, 2022 compared to $12,041,0002023 and $13.5 million at December 31, 2021.2022. The ACL represented 1.26%1.25% of outstanding loans at SeptemberJune 30, 20222023 and 1.25% of outstanding loans at December 31, 2021.2022. The allowance for unfunded commitments was $222,000$117,000 at SeptemberJune 30, 20222023 and $367,000$232,000 at December 31, 2021.2022. There were no nonperforming loans outstanding at SeptemberJune 30, 2022 or2023. The Company had one loan that was considered an individually evaluated credit at December 31, 2021.2022, with no specific allowance. This loan was paid off in full in January 2023.
The ACL has been established and is maintained to estimate the lifetime expected credit losses in the loan portfolio. An ongoing assessment is performed to determine if the balance is adequate. Charges or credits are made to expense based on changes in the economic forecast, qualitative risk factors, loan volume, and individual loans. For loans that are individually evaluated, the Company uses two impairment measurement methods: 1) the present value of expected future cash flows and 2) collateral value.
The Company also utilizes ratio analyses to evaluate the overall reasonableness of the ACL compared to its peers and required levels of regulatory capital. Federal and state regulatory agencies review the Company’s methodology for maintaining the ACL. These agencies may require the Company to adjust the ACL based on their judgments and interpretations about information available to them at the time of their examinations.
Summary of Credit Loss Experience
The following table presents information on the Company's (release of) provision for (release of) credit losses and analysis of the ACL:
| | | Third Quarter of | | Nine Months Ended | | Second Quarter of | | First Half of |
(In thousands) | (In thousands) | 2022 | | 2021 | | 2022 | | 2021 | (In thousands) | 2023 | | 2022 | | 2023 | | 2022 |
Allowance for credit losses at beginning of period | Allowance for credit losses at beginning of period | $ | 12,573 | | | $ | 11,171 | | | $ | 12,041 | | | $ | 11,944 | | Allowance for credit losses at beginning of period | $ | 13,254 | | | $ | 12,406 | | | $ | 13,539 | | | $ | 12,041 | |
Provision for (release of) credit losses | 476 | | | 350 | | | 996 | | | (440) | | |
Loans charged off | — | | | — | | | — | | | — | | |
Recoveries on loans previously charged off | — | | | 11 | | | 12 | | | 28 | | |
(Release of) provision for credit losses | | (Release of) provision for credit losses | (60) | | | 155 | | | (345) | | | 520 | |
Net recoveries | Net recoveries | — | | | 11 | | | 12 | | | 28 | | Net recoveries | — | | | 12 | | | — | | | 12 | |
Allowance for credit losses at end of period | Allowance for credit losses at end of period | $ | 13,049 | | | $ | 11,532 | | | $ | 13,049 | | | $ | 11,532 | | Allowance for credit losses at end of period | $ | 13,194 | | | $ | 12,573 | | | $ | 13,194 | | | $ | 12,573 | |
Allowance for unfunded commitments at beginning of Period | $ | 147 | | | $ | 147 | | | $ | 367 | | | $ | 567 | | |
Provision for (release of) credit losses | 75 | | | (10) | | | (145) | | | (430) | | |
| Allowance for unfunded commitments at beginning of period | | Allowance for unfunded commitments at beginning of period | $ | 177 | | | $ | 232 | | | $ | 232 | | | $ | 367 | |
(Release of) provision for credit losses | | (Release of) provision for credit losses | (60) | | | (85) | | | (115) | | | (220) | |
Allowance for unfunded commitments at end of period | Allowance for unfunded commitments at end of period | $ | 222 | | | $ | 137 | | | 222 | | | 137 | | Allowance for unfunded commitments at end of period | $ | 117 | | | $ | 147 | | | $ | 117 | | | $ | 147 | |
| | Loans outstanding: | Loans outstanding: | | | | | | | | Loans outstanding: | | | | | | | |
Average | Average | $ | 984,104 | | | $ | 873,070 | | | $ | 972,697 | | | $ | 885,274 | | Average | $ | 1,075,891 | | | $ | 973,871 | | | $ | 1,076,055 | | | $ | 966,900 | |
September 30 | 1,037,101 | | | 872,905 | | | 1,037,101 | | | 872,905 | | |
Ratio of ACL to loans outstanding: | | | | | | | | |
Average | 1.33 | % | | 1.32 | % | | 1.34 | % | | 1.30 | % | |
September 30 | 1.26 | % | | 1.32 | % | | 1.26 | % | | 1.32 | % | |
June 30 | | June 30 | $ | 1,055,848 | | | $ | 959,487 | | | $ | 1,055,848 | | | $ | 959,487 | |
Ratio of allowance for credit losses to loans outstanding at June 30 | | Ratio of allowance for credit losses to loans outstanding at June 30 | 1.25 | % | | 1.31 | % | | 1.25 | % | | 1.31 | % |
Operating Expenses
Total operating expenses for the Third Quartersecond quarter of 20222023 increased $5,631,000,$5.7 million, or 18.3%16.9%, compared to the Third Quartersecond quarter of 2021.2022. Total operating expenses for the Nine Months Ended 2022first half of 2023 increased $12,770,000,$14.2 million, or 14.3%21.8%, compared to the Nine Months Ended 2021.first half of 2022. The following table details the components of operating expenses:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | Third Quarter of | Nine Months Ended |
2022 | | 2021 | 2022 | | 2021 |
Personnel | $ | 26,999 | | | $ | 23,283 | | $ | 77,750 | | | $ | 68,689 | |
Occupancy | 970 | | | 953 | | 2,801 | | | 2,859 | |
Equipment | 1,633 | | | 1,700 | | 5,004 | | | 5,028 | |
Amortization of intangible assets | 195 | | | 215 | | 485 | | | 644 | |
Other operating | 6,524 | | | 4,539 | | 15,748 | | | 11,798 | |
Total operating expense | $ | 36,321 | | | $ | 30,690 | | $ | 101,788 | | | $ | 89,018 | |
Third Quarter | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Second Quarter of | | | First Half of | | |
2023 | | 2022 | | | 2023 | | 2022 | | |
Salaries and commissions | $ | 23,617 | | | $ | 20,932 | | | | $ | 46,222 | | | $ | 40,564 | | | |
Share-based compensation | 909 | | | 1,832 | | | | 2,859 | | | 3,172 | | | |
Net periodic pension cost (benefit) | 138 | | | (612) | | | | 273 | | | (1,231) | | | |
Other benefits | 4,768 | | | 3,881 | | | | 10,104 | | | 8,246 | | | |
Personnel | $ | 29,432 | | | $ | 26,033 | | | | $ | 59,458 | | | $ | 50,751 | | | |
Occupancy | 907 | | | 916 | | | | 1,762 | | | 1,831 | | | |
Equipment | 1,749 | | | 1,660 | | | | 3,399 | | | 3,371 | | | |
Amortization of intangible assets | 195 | | | 155 | | | | 390 | | | 290 | | | |
Other operating | 7,056 | | | 4,875 | | | | 14,702 | | | 9,224 | | | |
Total operating expense | $ | 39,339 | | | $ | 33,639 | | | | $ | 79,711 | | | $ | 65,467 | | | |
Second quarter of 20222023 compared to Third Quartersecond quarter of 2021:2022:
Personnel costsexpenses increased $3,716,000,$3.4 million, or 16.0%13.1%. Base salariesSalaries and commissions increased $2.7 million, or 12.8%, as a result of merit increases, wage pressures, and an increase in average full-time equivalent employees of 7.5%10.9% due to the Touchpoint acquisition and strategic investments in various technology initiatives, including improved rating engine capabilitiesinitiatives. Share-based compensation decreased $923,000 primarily related to revaluation of performance-based restricted shares in the second quarter of 2022. Pension expense increased $750,000. Despite the Company’s defined benefit pension plan being frozen in the first quarter of 2021, resulting in no service cost in subsequent periods, expense increased as a result of the accounting impact of the decline in plan assets during 2022 and investmentcorresponding decline in optical character recognition, artificial intelligence, machine learningexpected return on plan assets for 2023. Other benefits, such as 401(k) match, health insurance and other processespayroll taxes, increased $887,000, or 22.9%, primarily due to read images and produce data. Also driving the 10.9% increase in personnel expense were increasesaverage full-time equivalent employees as well as a significant increase in stock compensation and profit sharing of $241,000 and $448,000, respectively, due to improved Company earnings.employer health insurance costs over prior year levels.
Other operating expenses increased $1,985,000,$2.2 million, or 43.7%44.7%. These expenses increased due to higher levels of travel, employee procurement,Certain expense categories such as outside service fees and data processing are elevated as the Company invests in, and other professional fees. Partially causing the increase in data processing and other professional fees is investments in technology initiatives, resulting in elevated expense levels as multipletransitions to, improved technology. Multiple technology platforms are being maintained prior to switching over to what the Company believes will be more efficient technology platforms for facility and freighttransportation data entry processing by the end of 2023.
Nine Months Ended September 30, 2022First half of 2023 compared to Nine Months Ended September 30, 2021:first half of 2022:
Personnel costsexpenses increased $9,061,000,$8.7 million, or 13.2%17.2%, which included a salary and commission increase of $5.7 million, or 13.9%. Base salariesShare-based compensation decreased $313,000, and pension expense increased $1.5 million. Other benefits, such as 401(k) match, health insurance and payroll taxes, increased $1.9 million, or 22.5%. These personnel expense changes were all a result of merit increases, wage pressures, an increase in average full-time equivalent employeesthe same factors as the second quarter of 3.8% due to the Touchpoint acquisition and strategic investments in various technology initiatives as described above. Also driving the increase in personnel expense were increases in stock compensation and profit sharing of $1,894,000 and $1,061,000, respectively, due to improved Company earnings.2023.
Other operating expenses increased $3,950,000,$5.5 million, or 33.5%. These expenses increased due to higher levels59.4%, a result of travel, employee procurement, data processing and other professional feesthe same factors as described above.the second quarter of 2023.
Financial Condition
Total assets at SeptemberJune 30, 20222023 were $2,610,815,000, an increase$2.5 billion, a decrease of $55,914,000,$102.2 million, or 2.2%4.0%, from December 31, 2021.2022.
The Company experienced a decreasean increase in cash and cash equivalents of $167,934,000,$69.5 million, or 32.6%.34.6% during the first half of 2023. The change in cash and cash equivalents reflects the Company’s daily liquidity position and is primarily affected by changes in funding sources, mainly accounts and drafts payable and deposits, cash flows in and out of loans, investments securities and payments in advance of funding. The decrease in cash and cash equivalents was primarily due to growth in loans and investment securities, which utilized cash to fund such growth.
The investment securities portfolio increased $90,336,000,decreased $117.0 million, or 13.4%15.5%, during the first nine monthshalf of 2022. Cash2023. The decrease is due to the sale of $111.1 million of available-for-sale securities and cash equivalents were utilized to purchase U.S. treasury bonds, which increasedmaturities of $22.5 million, partially offset by purchases of $15.3 million.
Loans decreased $27.1 million, or 2.5% from $0 at December 31, 2021 to $155,119,000 at September 30, 2022. The Company purchased U.S. treasury bonds with maturities between one and two years.decrease was primarily due to a decrease in lease financing receivables of $26.5 million.
Loans increased $76,534,000,Payments in advance of funding decreased $24.6 million, or 8.0%8.4%. The Company experienced $88,936,000 of growth in commercial and industrial loansdecrease is primarily due to growtha 14.9% decrease in restaurant franchise loans and investment grade leases.transportation dollar volumes, which led to fewer dollars advanced to freight carriers.
Payments in advance of funding decreased $22,206,000, or 7.6%. The decrease in the balance is primarily due to timing as average balances are higher for the threeAccounts and nine months ended September 30, 2022 as compared to the same periods in 2021.
Other assets increased $69,588,000 due to an increase in the deferred tax asset of $20,747,000 as a result of unrealized losses on investment securities and an increase in accountsdrafts receivable from customers of $45,699,000.
Total liabilities at September 30, 2022 were $2,419,080,000, an increase of $109,977,000,decreased $12.2 million, or 4.8%12.7%, from December 31, 2021.2022. The decrease is solely due to timing of customer funding.
Total deposits at SeptemberJune 30, 20222023 were $1,229,721,000, an increase$1.2 billion, a decrease of $8,218,000,$65.8 million, or 0.7%5.2%, from December 31, 2021. Increases in demand deposits have offset declines in time deposits.2022. The Company experienced deposit attrition as larger depository clients moved their funds to higher interest rate alternatives outside of Cass Commercial Bank.
Accounts and drafts payable at SeptemberJune 30, 20222023 were $1,146,334,000, an increase$1.0 billion, a decrease of $95,938,000,$46.1 million, or 9.1%4.3%, from December 31, 2021.2022. The decrease in these balances, which are non-interest bearing, are primarily reflective of the decrease in fuel costs and overall freight rates in the transportation industry. Accounts and drafts payable are a stable source of funding generated by payment float from transportation and facility clients. Accounts and drafts payable will fluctuate from period-end to period-end due to the payment processing cycle, which results in lower balances on days when payments clear and higher balances on days when payments are issued. For this reason, average balances are generally a more meaningful measure of accounts and drafts payable (for average balances refer to the tables under the “Distributionpayable.
Total liabilities at June 30, 2023 were $2.3 billion, a decrease of Assets, Liabilities and Shareholders’ Equity; Interest Rate and Interest Differential” section of this report).$111.0 million, or 4.7%, from December 31, 2022.
Total shareholders’ equity at SeptemberJune 30, 20222023 was $191,735,000, a $54,063,000,$215.1 million, an $8.8 million, or 22.0%4.3%, decreaseincrease from December 31, 2021. Total2022. The increase in shareholders’ equity decreased due tois a changeresult of year-to-date 2023 earnings of $14.3 million and a decrease in accumulated other comprehensive loss of $66,832,000 as a result of$2.9 million due to the decline in market interest rates continuing to rise and the negativeresulting positive impact on the fair value of existingavailable-for-sale investment securities, share repurchases of $5,299,000, and dividends paid of $11,478,000.securities. These decreasesincreases were partially offset by net incomedividends paid of $25,619,000$7.9 million and stock-based compensation expensethe repurchase of $4,479,000.Company stock of $2.4 million.
Liquidity and Capital Resources
The discipline of liquidity management as practiced by the Company seeks to ensure that funds are available to fulfill all payment obligations relating to invoices processed as they become due and meet depositor withdrawal requests and borrower credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of funds. Primary liquidity to meet demand is provided by short-term liquid assets that can be converted to cash, maturing securities and the ability to obtain funds from external sources. The Company's Asset/Liability Committee has direct oversight responsibility for the Company's liquidity position and profile. Management considers both on-balance sheet and off-balance sheet items in its evaluation of liquidity.
The balance of liquid assets consists of cash and cash equivalents, which include cash and due from banks, interest-bearing deposits in other financial institutions, federal funds sold and money market funds. Cash and cash equivalents totaled $346,994,000$270.5 million at SeptemberJune 30, 2022, a decrease2023, an increase of $167,934,000,$69.5 million, or 32.6%34.6%, from December 31, 2021.2022. At SeptemberJune 30, 2022,2023, these assets represented 13.3%10.9% of total assets. These fundsassets and are the Company’s and its subsidiaries’ primary source of liquidity to meet future expected and unexpected loan demand, depositor withdrawals or reductions in accounts and drafts payable.
Secondary sources of liquidity include the investment portfolio and borrowing lines. Total investment securities were $763,789,000$637.5 million at SeptemberJune 30, 2022, an increase2023, a decrease of $90,336,000$117.0 million from December 31, 2021.2022. These assets represented 29.3%25.8% of total assets at SeptemberJune 30, 2022.2023. Of the total portfolio, 8.5%17.6% mature in one year, 34.1%22.3% mature in one to five years, and 57.4%60.1% mature in five or more years.
The Bank has unsecured lines of credit at six correspondent banks to purchase federal funds up to a maximum of $83,000,000$83.0 million in aggregate. As of SeptemberJune 30, 2022,2023, the Bank also has secured lines of credit with the Federal Home Loan Bank of $228,858,000$214.3 million collateralized by mortgage loans. The Company also has secured lines of credit from twothree banks up to a maximum of $150,000,000$250.0 million in aggregate collateralized by state and political subdivisioninvestment securities. There were no amounts outstanding under any line of credit as of SeptemberJune 30, 20222023 or December 31, 2021.2022.
The deposits of the Company's banking subsidiary have historically been stable, consisting of a sizable volume of core deposits related to customers that utilize other commercial products of the Bank.Bank, including CassPay and faith-based customers. The accounts and drafts payable generated by the Company has also historically been a stable source of funds. The Company is part of the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) deposit placement programs. Time deposits include $18,220,000$36.5 million of CDARS deposits and interest-bearing demand deposits include $117,993,000$125.8 million of ICS deposits. These programs offer the Bank’s customers the ability to maximize Federal Deposit Insurance Corporation (“FDIC”) insurance coverage. The Company uses these programs to retain or attract deposits from existing customers.
Net cash flows provided by operating activities were $40,799,000$17.0 million for the ninesix months ended SeptemberJune 30, 2023, compared to $31.1 million for the six months ended June 30, 2022, compared to $30,680,000 for the nine months ended September 30, 2021, an increasea decrease of $10,119,000.$14.1 million. Net cash flows from investing and financing activities fluctuate greatly as the Company actively manages its investment and loan portfolios and customer activity influences changes in deposit and accounts and drafts payable balances. Other causes for the changes in these account balances are discussed earlier in this report. Due to the daily fluctuations in these account balances, the analysis of changes in average balances, also discussed earlier in this report, can be more indicative of underlying activity than the period-end balances used in the statements of cash flows. Management anticipates that cash and cash equivalents, maturing investments and cash from operations will continue to be sufficient to fund the Company’s operations and capital expenditures in 2022,2023, which are estimated to range from $4$8 million to $6$10 million.
Net income plus amortization of intangible assets, net amortization of premium/discount on investment securities and depreciation of premises and equipment was $19.0 million and $22.5 million for the three months ended June 30, 2023 and 2022, respectively, a decrease of $3.5 million. The decrease was due to lower net income of $2.6 million and lower net amortization of premium/discount on investment securities of $1.0 million. The net amortization of premium/discount on investment securities is dependent on the type of securities purchased and changes in the prevailing market interest rate environment.
Other factors impacting the $14.1 million decrease in net cash provided by operating activities include:
•A decrease in other operating activities, net of $5.9 million, primarily due to changes in various accounts receivable and payable;
•An increase in accounts receivable of $3.6 million due to the timing of customer payments;
•A decrease in current income tax liability of $1.7 million; and
•A change in the (release of) provision for credit losses of $760,000 primarily due to changes in loans outstanding during the respective periods.
These factors were partially offset by an increase in the pension liability of $1.5 million.
The Company faces market risk to the extent that its net interest income and fair market value of equity are affected by changes in market interest rates. For information regarding the market risk of the Company’s financial instruments, see Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”
There are several trends and uncertainties that may impact the Company’s ability to generate revenues and income at the levels that it has in the past. In addition, these trends and uncertainties may impact available liquidity. Those that could significantly impact the Company include the general levels of interest rates, business activity, inflation, and energy costs as well as new business opportunities available to the Company.
As a financial institution, a significant source of For more detailed information on these trends and uncertainties and how they can generally affect the Company’s earnings is generated from net interest income. Therefore, the prevailing interest rate environment is important toavailable liquidity, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity” in the Company’s performance. A major portion of the Company’s funding sources are the non-interest bearing accounts and drafts payable generated from its payment and information processing services. Accordingly, higher levels of interest rates will generally allow the Company to earn more net interest income. Conversely, a lower interest rate environment will generally tend to depress net interest income. The Company actively manages its balance sheet in an effort to maximize net interest income as the interest rate environment changes. This balance sheet management impacts the mix of earning assets maintained by the Company at any point in time. For example, in a low interest rate environment, short-term relatively lower rate liquid investments may be reduced in favor of longer term relatively higher yielding investments and loans. If the primary source of liquidity is reduced in a low interest rate environment, a greater reliance would be placed on secondary sources of liquidity including borrowing lines, the ability of the Bank to generate deposits, and the investment portfolio to ensure overall liquidity remains at acceptable levels.
The overall level of economic activity can have a significant impact on the Company’s ability to generate revenues and income, as the volume and size of customer invoices processed may increase or decrease. Higher levels of economic activity increase both fee income (as more invoices are processed) and balances of accounts and drafts payable. Lower levels of economic activity, such as those previously experienced by the Company as a result of COVID-19 and governmental actions related thereto, decrease both fee income and balances of accounts and drafts payable.
The relative level of energy costs can impact the Company’s earnings and available liquidity. Lower levels of energy costs will tend to decrease transportation and energy invoice amounts resulting in a corresponding decrease in accounts and drafts payable. Decreases in accounts and drafts payable generate lower interest income.
New business opportunities are an important component of the Company’s strategy to grow earnings and improve performance. Generating new customers allows the Company to leverage existing systems and facilities and grow revenues faster than expenses.2022 Form 10-K.
As a bank holding company, the Company and the Bank are subject to capital requirements pursuant to the FRB’s capitaladministered by state and federal banking agencies. Capital adequacy guidelines, which include (i) risk-based capital guidelines, which are designed to make capital requirements more sensitive to various risk profiles and, account for banks, prompt correct action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet exposure; (ii) guidelines that consider market risk, which is the risk of loss due to change in value of assetsitems calculated under regulatory accounting practices. Capital amounts and liabilities due to changes in interest rates; and (iii) guidelines that use a leverage ratio which places a constraint on the maximum degree of risk to which a financial holding company may leverage its equity capital base.
The Basel III Capital Rules require banking organizations, like Cass, to maintain:
•a minimum ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer;
•a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus a 2.5% capital conservation buffer;
•a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer; and
•a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets.
The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall.
Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for non-advanced approaches institutions like Cass that have exercised a one-time opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The calculation of all types of regulatory capital isclassifications are subject to deductionsqualitative judgments by regulators about components, risk weighting, and adjustments specified in applicable regulations.
Theother factors. In addition, the calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. For instance,example, as allowed under the Basel III Capital Rules, the Company has elected to opt-out of the requirement to include most components of accumulated other comprehensive income in common equity Tier 1 capital. For more information on these regulatory requirements, including the Basel III Capital Rules and capital classifications, see Item 1, "Business-Supervision and Regulation" of the Capital Simplification Rules provide for a numberCompany's 2022 Form 10-K.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets, are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans, and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
The Company and the Bank continue to exceed all regulatory capital requirements, as evidenced by the following capital amounts and ratios:
| | | September 30, 2022 | | December 31, 2021 | | Actual | | Capital Requirements | | Requirement to be Well-Capitalized |
(Dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | |
(In thousands) | | (In thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
At June 30, 2023 | | At June 30, 2023 | |
Total capital (to risk-weighted assets) | Total capital (to risk-weighted assets) | | Total capital (to risk-weighted assets) | |
Cass Information Systems, Inc. | Cass Information Systems, Inc. | $ | 248,833 | | | 14.07 | % | | $ | 240,265 | | | 14.86 | % | Cass Information Systems, Inc. | $ | 263,467 | | | 14.39 | % | | $ | 146,482 | | | 8.00 | % | | $ N/A | | N/A % |
Cass Commercial Bank | Cass Commercial Bank | 183,264 | | | 16.08 | % | | 174,614 | | | 17.21 | % | Cass Commercial Bank | 191,355 | | | 17.06 | | | 89,726 | | | 8.00 | | | 112,157 | | | 10.00 | |
Common equity tier I capital (to risk-weighted assets) | | | | | | | | |
Common Equity Tier I Capital (to risk-weighted assets) | | Common Equity Tier I Capital (to risk-weighted assets) | |
Cass Information Systems, Inc. | Cass Information Systems, Inc. | $ | 235,784 | | | 13.33 | % | | $ | 228,224 | | | 14.11 | % | Cass Information Systems, Inc. | 250,156 | | | 13.66 | | | 82,396 | | | 4.50 | | | N/A | | N/A |
Cass Commercial Bank | Cass Commercial Bank | 170,532 | | | 14.96 | % | | 163,030 | | | 16.07 | % | Cass Commercial Bank | 178,800 | | | 15.94 | | | 50,471 | | | 4.50 | | | 72,902 | | | 6.50 | |
Tier I capital (to risk-weighted assets) | Tier I capital (to risk-weighted assets) | | | | | | | | Tier I capital (to risk-weighted assets) | |
Cass Information Systems, Inc. | Cass Information Systems, Inc. | $ | 235,784 | | | 13.33 | % | | $ | 228,224 | | | 14.11 | % | Cass Information Systems, Inc. | 250,156 | | | 13.66 | | | 109,862 | | | 6.00 | | | N/A | | N/A |
Cass Commercial Bank | Cass Commercial Bank | 170,532 | | | 14.96 | % | | 163,030 | | | 16.07 | % | Cass Commercial Bank | 178,800 | | | 15.94 | | | 67,294 | | | 6.00 | | | 89,726 | | | 8.00 | |
Tier I capital (to leverage assets) | | | | | �� | | | |
Tier I capital (to average assets) | | Tier I capital (to average assets) | |
Cass Information Systems, Inc. | Cass Information Systems, Inc. | $ | 235,784 | | | 9.08 | % | | $ | 228,224 | | | 9.21 | % | Cass Information Systems, Inc. | 250,156 | | | 10.65 | | | 93,973 | | | 4.00 | | | N/A | | N/A |
Cass Commercial Bank | Cass Commercial Bank | 170,532 | | | 10.44 | % | | 163,030 | | | 11.05 | % | Cass Commercial Bank | 178,800 | | | 12.37 | | | 57,839 | | | 4.00 | | | 72,299 | | | 5.00 | |
At December 31, 2022 | | At December 31, 2022 | |
Total capital (to risk-weighted assets) | | Total capital (to risk-weighted assets) | |
Cass Information Systems, Inc. | | Cass Information Systems, Inc. | $ | 257,313 | | | 13.52 | % | | $ | 152,306 | | | 8.00 | % | | $ N/A | | N/A % |
Cass Commercial Bank | | Cass Commercial Bank | 186,075 | | | 16.00 | | | 93,044 | | | 8.00 | | | 116,305 | | | 10.00 | |
Common Equity Tier I Capital (to risk-weighted assets) | | Common Equity Tier I Capital (to risk-weighted assets) | |
Cass Information Systems, Inc. | | Cass Information Systems, Inc. | 243,774 | | | 12.80 | | | 85,672 | | | 4.50 | | | N/A | | N/A |
Cass Commercial Bank | | Cass Commercial Bank | 172,848 | | | 14.86 | | | 52,337 | | | 4.50 | | | 75,598 | | | 6.50 | |
Tier I capital (to risk-weighted assets) | | Tier I capital (to risk-weighted assets) | |
Cass Information Systems, Inc. | | Cass Information Systems, Inc. | 243,774 | | | 12.80 | | | 114,229 | | | 6.00 | | | N/A | | N/A |
Cass Commercial Bank | | Cass Commercial Bank | 172,848 | | | 14.86 | | | 69,783 | | | 6.00 | | | 93,044 | | | 8.00 | |
Tier I capital (to average assets) | | Tier I capital (to average assets) | |
Cass Information Systems, Inc. | | Cass Information Systems, Inc. | 243,771 | | | 9.52 | | | 102,386 | | | 4.00 | | | N/A | | N/A |
Cass Commercial Bank | | Cass Commercial Bank | 172,848 | | | 10.77 | | | 64,196 | | | 4.00 | | | 80,245 | | | 5.00 | |
Inflation
The Company’s assets and liabilities are primarily monetary, consisting of cash, cash equivalents, securities, loans, payables and deposits. Monetary assets and liabilities are those that can be converted into a fixed number of dollars. The Company's consolidated balance sheet reflects a net positive monetary position (monetary assets exceed monetary
liabilities). During periods of inflation, the holding of a net positive monetary position will result in an overall decline in the purchasing power of a company. Management believes that replacement costs of equipment, furniture, and leasehold improvements will not materially affect operations. The rate of inflation does affect certain expenses, such as those for employee compensation, which may not be readily recoverable in the price of the Company’s services.
Impact of New and Not Yet Adopted Accounting Pronouncements
ThereIn March 2022, the FASB issued ASU 2022-02. This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL methodology for estimating allowances for credit losses and enhances the disclosure requirements for loan restructurings made with borrowers experiencing financial difficulty. Instead, entities are norequired to evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new accounting pronouncements that are applicableloan or continuation of an existing loan. In addition, the amendments require a public business entity to disclose current period gross charge-offs for financing receivables and net investment in leases by year of origination in the company and/or materiallyvintage disclosures. ASU 2022-02 was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The implementation of this ASU effective January 1, 2023 did not have a material impact on the Company.consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described in the Company’s Annual Report on2022 Form 10-K for the year ended December 31, 2021,2022, the Company manages its interest rate risk through measurement techniques that include gap analysis and a simulation model. As part of the risk management process, asset/liability management policies are established and monitored by management.
The following table summarizes simulated changes in net interest income versus unchanged rates over the next 12 months as of SeptemberJune 30, 20222023 and December 31, 2021.2022.
| | | % change in projected net interest income | | % change in projected net interest income |
| | | September 30, 2022 | | December 31, 2021 | | | June 30, 2023 | | December 31, 2022 |
+200 basis points | +200 basis points | | 13.1 | % | | 20.6 | % | +200 basis points | | 12.7 | % | | 10.6 | % |
+100 basis points | +100 basis points | | 5.5 | % | | 10.2 | % | +100 basis points | | 7.4 | % | | 4.2 | % |
Flat rates | Flat rates | | — | % | | — | % | Flat rates | | — | % | | — | % |
-100 basis points | -100 basis points | | (2.5) | % | | (2.5) | % | -100 basis points | | (3.3) | % | | — | % |
-200 basis points | -200 basis points | | (11.9) | % | | N/M | -200 basis points | | (5.7) | % | | (1.5) | % |
The decrease inCompany is generally asset sensitive as average interest-earning assets of $2.0 billion for the second quarter of 2023 greatly exceeded average interest-bearing liabilities of $512.5 million. The table above on the projected net interest income in a risingimpact of interest rate environmentshocks results from December 31, 2021 to Septembera static balance sheet at June 30, 2022 is primarily due to the purchase of $155,119,000 in U.S. treasury bonds throughout the first nine months of 2022. These bonds mature over a one to two year period and were purchased utilizing available liquid cash and cash equivalents.2023.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management, under the supervision and with the participation of the principal executive officer and the principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report and concluded that, as of such date, these controls and procedures were effective.
There were no changes in the Third Quartersecond quarter of 20222023 in the Company's internal control over financial reporting identified by the Company’s principal executive officer and principal financial officer in connection with their evaluation that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is the subject of various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of business. Management believes the outcome of all such proceedings will not have a material effect on the businesses or financial conditions of the Company or its subsidiaries.
ITEM 1A. RISK FACTORS
The Company has included in Part I, Item 1A of its Annual Report on2022 Form 10-K, for the year ended December 31, 2021, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). ThereExcept as set forth below, there are no material changes to the Risk Factors as disclosed in the Company’s 2021 Annual Report on2022 Form 10-K.
The Company could experience an unexpected inability to obtain needed liquidity which could adversely affect the Company's business, profitability, and viability as a going concern.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities and is essential to a financial institution’s business. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. The bank failures in March 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution's ability to satisfy its obligations to depositors. The Company seeks to ensure funding needs are met by maintaining a level of liquidity through asset and liability management. If the Company becomes unable to obtain funds when needed, it could have a material adverse effect on its business, financial condition, and results of operations.
Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.
The recent high-profile bank failures have generated significant market volatility among publicly traded bank holding companies. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.
Rising interest rates have decreased the value of the Company’s available-for-sale securities portfolio, and the Company would realize losses if it were required to sell such securities to meet liquidity needs.
As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the fair value of previously issued government and other fixed income securities has declined significantly, resulting in unrealized losses. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. Treasuries, agency debt, mortgage-backed securities, and other qualifying assets as collateral at par to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.
Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.
The Company anticipates increased regulatory scrutiny and new regulations designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its
profitability. Among other things, there may be an increased focus by regulators on deposit composition and the level of uninsured deposits. As primarily a commercial bank, the Bank has a higher degree of uninsured deposits compared to larger national banks or smaller community banks with a stronger focus on retail deposits. As a result, the Bank could face increased scrutiny or be viewed as higher risk.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.During the three months ended June 30, 2023, the Company repurchased a total of 63,305 shares of its common stock pursuant to its treasury stock buyback program, as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
April 1, 2023–April 30, 2023 | 13,678 | | | $ | 37.10 | | | 13,678 | | | 327,029 | |
May 1, 2023–May 31, 2023 | 45,921 | | | 37.56 | | | 45,921 | | | 281,108 | |
June 1, 2023–June 30, 2023 | 3,706 | | | 39.13 | | | 3,706 | | | 277,402 | |
Total | 63,305 | | | $ | 37.55 | | | 63,305 | | | 277,402 | |
(1)All repurchases made during the quarter ended June 30, 2023 were made pursuant to the treasury stock buyback program, authorized by the Board of Directors on October 19, 2021 and announced by the Company on October 21, 2021. The program provides that the Company may repurchase up to an aggregate of 750,000 shares of common stock and has no expiration date.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a)None.
(b)There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented in the Third Quartersecond quarter of 2022.2023.
(c)During the three months ended June 30, 2023, none of the Company's officers or directors adopted or terminated any "Rule 10b5-1 trading arrangement" or any “non-Rule 10b5-1 trading arrangement,” as such terms are defined under Item 408 of Regulation S-K.
ITEM 6. EXHIBITS
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Exhibit 101.INS XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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Exhibit 101.SCH Inline XBRL Taxonomy Extension Schema Document. |
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Exhibit 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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Exhibit 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. |
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Exhibit 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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Exhibit 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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Exhibit 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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*Management contract or compensatory plan arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| CASS INFORMATION SYSTEMS, INC. |
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DATE: NovemberAugust 7, 20222023 | By | /s/ EricMartin H. BrunngraberResch |
| | EricMartin H. BrunngraberResch |
| | ChairmanPresident and Chief Executive Officer |
| | (Principal Executive Officer) |
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DATE: NovemberAugust 7, 20222023 | By | /s/ Michael J. Normile |
| | Michael J. Normile |
| | Executive Vice President and Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |